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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1997
/ / Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the transition Period from ________to________
Commission File Number 0-10379
INTERFERON SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 249-3250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter Period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of April 9, 1998, the aggregate market value of the outstanding
shares of the registrant's Common Stock, par value $.01 per share, held by
non-affiliates (assuming for this calculation only that all officers and
directors are affiliates) was approximately $26,500,000 based on the last
reported sale price of such stock on the NASDAQ National Market System on April
9, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 12 , 1998
----- ------------------------------
Common Stock, par value $.01 per share 15,234,774 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 12
Item 3. Legal Proceedings ............................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ............. 12
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters ............................................. 13
Item 6. Selected Financial Data ......................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 15
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk ..................................................... 19
Item 8. Financial Statements and Supplementary Data ..................... 20
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure ............................. 36
Item 10. Directors and Executive Officers of the Registrant .............. 37
Item 11. Executive Compensation .......................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................................. 37
Item 13. Certain Relationships and Related Transactions .................. 37
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ......................................... 38
PART I
Item 1. Business
(a) General Development of Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
engaged in the study, manufacture, and sale of pharmaceutical products based on
its highly purified, multispecies, natural source alpha interferon ("Natural
Alpha Interferon"). The Company's ALFERON N Injection(R)(Interferon Alfa-n3)
product has been approved by the United States Food and Drug Administration
("FDA")for the treatment of certain types of genital warts and is being studied
for potential use in the treatment of HIV, hepatitis C, and other indications.
The Company also is studying ALFERON N Gel(R) and ALFERON LDO(R), the Company's
topical and oral formulations of Natural Alpha interferon, for the potential
treatment of viral and immune system diseases.
(b) Financial Information about Business Segments.
This Item is not applicable because the Company has only a single line
of business.
(c) Narrative Description of Business
Scientific Background
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma, and omega. The Company's three ALFERON products
contain a form of alpha interferon. The worldwide market for injectable alpha
interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for 17 major medical uses worldwide.
Alpha interferons are manufactured commercially in three ways: by
genetic engineering, by cell culture, and from human white blood cells. In the
United States, only two types of alpha interferon are approved for commercial
sale: recombinant (genetically engineered) alpha interferon and Natural Alpha
Interferon, which is manufactured from human white blood cells. Outside of the
United States, sales of alpha interferon produced by cell culture account for a
significant portion of the market.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferon may be based upon their respective
molecular compositions. Natural Alpha Interferon is composed of a family of
proteins containing many different molecular species of interferon. In contrast,
recombinant alpha interferons each contain only a single species. Researchers
have reported that the various species of interferon may have differing
antiviral activity depending upon the type of virus. Natural Alpha Interferon
presents a broad complement of species which the Company believes may account
for its higher efficacy in laboratory studies with the HIV virus compared with
that of recombinant alpha interferon 2a and 2b (ROFERON(R) A and INTRON(R) A,
respectively). Natural Alpha Interferon is also glycosylated (partially covered
with sugar molecules). Such glycosylation is not present on the currently
marketed recombinant alpha interferons. The Company believes that the absence of
glycosylation may be responsible for the production of interferon-neutralizing
antibodies seen in patients treated with recombinant alpha interferon.
The production of Natural Alpha Interferon is dependent upon a supply
of human white blood cells and other essential materials. The Company currently
obtains white blood cells from FDA-licensed blood donor centers.
ALFERON N Injection
Approved Indication. On October 10, 1989, the FDA approved ALFERON N
Injection for the intralesional treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Substantially all of the Company's revenues, to date, have been generated
from the sale of ALFERON N Injection for such treatment. Genital warts, a
sexually transmitted disease, are caused by certain types of human
papillomaviruses. A published report estimates that approximately eight million
new and recurrent cases of genital warts occur annually in the United States
alone. Genital warts are usually treated using caustic chemicals or through
physical removal methods. These procedures can be quite painful and effective
treatment is often difficult to achieve.
1
Clinical Trials for New Indications. In an effort to obtain approval to
market ALFERON N Injection for additional indications in the United States and
around the world, the Company is focusing its research program on conducting and
planning various clinical trials for new indications.
HIV-infected patients. The Human Immunodeficiency Virus ("HIV")
infection is at epidemic levels in the world. The World Health Organization
projects that this virus will affect 30 to 40 million people by the year 2000.
HIV infection usually signals the start of a progressive disease that
compromises the immune systems, ultimately resulting in Acquired Immune
Deficiency Syndrome ("AIDS"). The United States Centers for Disease Control
estimates that as of the middle of 1997, there were approximately 259,000 cases
of AIDS in the United States. A recent study in the Journal of the American
Medical Association estimated that 650,000 to 900,000 U.S. residents were living
with HIV infection.
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed Army Institute of Research ("Walter Reed") in
collaboration with the Company's scientists indicated that the various
interferon species display vast differences in their ability to affect virus
replication. Walter Reed researchers found that the Company's Natural Alpha
Interferon was 10 to 100 times more effective than equal concentrations of
recombinant alpha interferon 2a and 2b in blocking the replication of HIV-1, the
AIDS virus, in infected human cells in vitro.
Moreover, the Company's scientists were able to separate members of the
interferon family in single protein fractions or clusters of proteins using
advanced fractionation techniques. The individual fractions were tested for
their ability to block HIV replication in the laboratory by researchers at
Walter Reed. They found that the unusual anti-HIV activity was attributable to
very specific fractions in the Company's product. The most active fractions are
not present in marketed recombinant interferon.
This information provided additional support for a long-held belief of
the Company that its Natural Alpha Interferon has unique anti-viral properties
distinguishing it from recombinant interferon products. In addition, published
reports of trials using recombinant alpha interferon in asymptomatic
HIV-infected patients indicated that while high doses blocked virus production
in many cases, such doses resulted in high levels of adverse reactions, thereby
limiting the usefulness of the recombinant product. These facts led the Walter
Reed researchers to conduct a Phase 1 clinical trial with the Company's product
in asymptomatic HIV-infected patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial with
asymptomatic HIV-infected patients to investigate the safety and tolerance, at
several dose regimens, of ALFERON N Injection, self-injected subcutaneously for
periods of up to 24 weeks. The investigators concluded that the treatment was
"surprisingly" well tolerated by patients, at all dose regimens. Preliminary
findings were reported by Walter Reed at the IXth International Conference on
AIDS in Berlin in 1993. The investigators also reported that the expected
interferon side effects, such as flu-like symptoms, were rare or absent in the
majority of patients treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to provide
safety information on various doses of ALFERON N Injection used for extended
periods of time, there were encouraging indications that certain disease
parameters had stabilized or even improved in certain patients by the end of the
experimental treatment.
In a follow-up analysis of patients' blood testing data, it was found
after an average of 16 months after treatment, CD4 white blood cell counts
remained essentially unchanged or were higher than at the onset of the trial in
11 of 20 patients. In addition, while on treatment, the amount of HIV detectable
in the patients' blood, as measured by polymerase chain reaction ("PCR")
testing, declined in a dose dependent manner (the greatest declines were
observed in the highest dose group). Also, none of the patients were found to
have developed neutralizing antibodies to Natural Alpha Interferon, even after
being treated three times weekly for many months. These results were reported at
the Third International Congress on Biological Response Modifiers held in
Cancun, Mexico in January 1995 and were selected for a poster presentation at
the 35th Interscience Conference on Antimicrobial Agents and Chemotherapy held
in San Francisco in September 1995. An extensive report was published in the May
1996 issue of the Journal of Infectious Diseases.
It is important to note that, because of the small number of study
participants and the absence of a control group, no firm conclusions can be
drawn from these observations. However, based on the safety and preliminary
2
efficacy data obtained from this trial and after meeting with the FDA, the
Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection
in HIV-infected patients, which was completed in December 1997. This randomized,
double-blind, placebo-controlled trial was designed to evaluate the safety and
efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may have been taking other FDA-approved antiviral agents. Enrolled
patients were required to have CD4 white blood cell counts of at least 250 cells
per microliter and a viral burden (as determined by PCR testing) of at least
2,000 RNA copies per milliliter. The Company completed the preliminary analysis
of the data collected from the 16 investigator sites and scheduled a pre-filing
meeting with the FDA in mid-March 1998. Shortly after that meeting, the FDA
advised the Company that, although ALFERON N Injection demonstrated biological
activity in this Phase 3 clinical trial, the results were insufficient for
filing for approval for this additional indication for ALFERON N Injection.
While the results over the course of treatment demonstrated benefits that were
statistically significant for the group of patients receiving ALFERON N
Injection and highly statistically significant for the subgroup of such patients
with high CD4 counts, the study's primary efficacy variable (reduction in viral
load) was not met at the time point specified in the protocol (end of
treatment). The FDA therefore indicated that an additional trial will be
necessary to evaluate further the efficacy of ALFERON N Injection for this
indication. The Company is currently evaluating its options with respect to the
HIV program.
After satisfactorily completing the 24-week treatment in this Phase 3
trial, patients were eligible to enroll in a separate open-label continuation
study to evaluate the safety and efficacy of different maintenance treatment
regimens. Approximately 93% of such eligible patients have chosen to enroll in
the continuation study. There can be no assurance that ALFERON N Injection for
the treatment of patients with HIV will be cost-effective, safe, and effective
or that the Company will be able to obtain FDA approval for such use.
Furthermore, even if such approval is obtained, there can be no assurance that
such product will be commercially successful or will produce significant
revenues or profits for the Company.
Hepatitis C. Chronic viral hepatitis is a liver infection caused by
various hepatitis viruses. The United States Centers for Disease Control
estimates that nearly four million people in the United States are presently
infected with the hepatitis C virus ("HCV"), a majority of whom become chronic
carriers and will suffer gradual deterioration of their liver and possibly
cancer of the liver. Several brands of recombinant and cell-cultured interferon
have been approved by various regulatory agencies worldwide for the treatment of
hepatitis C, including three recombinant products in the United States. See
"Business -- ALFERON N Injection -Competition." However, reports have indicated
that many patients either do not respond to treatment with the recombinant
products or relapse after treatment. The Company has conducted three
multi-center, randomized, open-label, dose-ranging Phase 2 clinical trials
utilizing ALFERON N Injection with patients chronically infected with HCV. The
objective of the Company's HCV clinical studies was to compare the safety and
efficacy of different doses of Natural Alpha Interferon injected subcutaneously
in naive (previously untreated), refractory (unsuccessfully treated with
recombinant interferon), and relapsing (initially responded to recombinant
interferon but later relapsed) patients.
The results in naive patients indicated a significant dose-dependent
response at the end of treatment. In addition, treatment of naive patients with
ALFERON N Injection did not produce any interferon-neutralizing antibodies. An
oral presentation of the results in naive patients was given at the American
Association for the Study of Liver Diseases ("AASLD") meeting that took place in
November 1995. The results of this study were published in the February 1997
issue of Hepatology.
The results in refractory patients indicated a significant response at
the end of treatment in the highest dose group. A poster presentation of the
results in refractory patients was given at the AASLD meeting that took place in
November 1995.
As a result of the promising results obtained in the study on naive
patients, the study on relapsing patients, which was accruing patients slowly,
was terminated early so that the Company could concentrate its limited resources
on pursuing the Phase 3 trials in naive patients, discussed below.
After meeting with the FDA, the Company commenced in the second quarter
of 1996 a Phase 3 multi-center, randomized, controlled clinical trial designed
to evaluate the safety and efficacy of ALFERON N Injection in naive chronic
hepatitis C patients. The trial consists of a 24-week treatment phase and
24-week follow-up and also includes an interim analysis after approximately
one-half of the enrolled patients complete the treatment and follow-up phases.
3
On April 2, 1998, the Company announced it had completed the interim
analysis of the results for approximately half of the enrolled patients. If the
results of the interim analysis had demonstrated at a very high level of
statistical significance that ALFERON N Injection is effective, the Company
intended to seek FDA approval while continuing to follow the other enrolled
patients. However, while the efficacy analysis indicated that ALFERON N
Injection and the control treatment (an approved therapy) appear to be
equivalent, the study protocol requires a showing of superiority in order to
meet the criteria for statistical significance in the interim analysis, and
the Company will therefore not seek FDA approval based on the interim analysis.
The Company expects that all patients will complete the study by mid- year,
followed by a final analysis in the third quarter of 1998. If the results at
the end of the trial are favorable (which to be statistically significant must
demonstrate superiority over the control treatment for all enrolled patients as
a group), the Company intends to seek FDA approval approval in the fourth
quarter of 1998. However, there can be no assurance that such efficacy results
will be demonstrated at the time of the final analysis or that the use of
ALFERON N Injection for the treatment of patients with hepatitis C will be
cost-effective, safe, and effective or that the Company will be able to obtain
FDA approval for such use. Furthermore, even if such approval is obtained,
there can be no assurance that such product will be commercially successful or
will produce significant revenues or profits for the Company.
HIV and hepatitis C co-infected patients. In December 1997, patient
enrollment commenced in a Phase 2 multi-center, open label clinical trial
designed to evaluate the safety and efficacy of ALFERON N Injection in patients
co-infected with HIV and HCV. The trial consists of a 24-week treatment phase
and 24-week follow-up. Two groups of patients with chronic hepatitis C will be
studied - one with significant HIV viral levels and the other with low or
undetectable levels. The patients' HIV and HCV viral levels will be evaluated
throughout the treatment and follow-up phases. It is estimated that
approximately 10% of HIV-infected patients are co-infected with HCV.
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic, sometimes
progressive, immune-mediated disease of the central nervous system that is
believed to occur in genetically predisposed individuals following exposure to
an environmental factor, such as virus infection. The disease affects an
estimated 250,000 to 350,000 people in the United States, primarily young
adults. Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the patient's own
cells attack and ultimately destroy the insulating myelin sheath surrounding the
brain and spinal cord nerve fibers, resulting in improper transmission of
signals throughout the nervous system.
In the United States, two recombinant forms of beta interferon have
been approved for the treatment of relapsing-remitting MS. However, reports in
the scientific literature and elsewhere have indicated that the significant
adverse reactions associated with the treatments may limit their usefulness. In
addition, Copaxone(R), a non-interferon product was recently approved by the FDA
to treat relapsing-remitting multiple sclerosis. Based in part on encouraging
anecdotal reports on the use of ALFERON N Injection in MS patients, the Company
would like to conduct a clinical trial in order to investigate the potential
use of ALFERON N Injection for the treatment of MS. However, the timing of this
trial will be dependent upon the Company's ability to obtain additional funding
or a sponsor.
Marketing and Distribution. The Company completed the reacquisition of
marketing and distribution rights for ALFERON N Injection from The Purdue
Frederick Company ("Purdue") in May 1996. The Company believes that the
reacquisition of marketing provides it with greater financial flexibility and
control over the distribution of ALFERON N Injection. Since the reacquisition,
the Company has focused its efforts in the United States on making additional
sales to existing customers. In May 1997, the Company entered into an agreement
appointing Alternate Site Distributors, Inc. ("ASD"), a subsidiary of Bergen
Brunswig Corporation, the sole United States distributor of ALFERON N Injection.
Pursuant to such agreement, ASD will also provide clinical and product
information, reimbursement information and services, and management of patient
assistance services.
In 1996, the Company entered into a supply and distribution agreement
(the "Cell Pharm Agreement") with Cell Pharm GmbH ("Cell Pharm"). Cell Pharm,
headquartered in Hanover, Germany, is a privately-owned pharmaceutical company
primarily involved in the distribution and manufacture of products for cancer
treatment and other uses. The Cell Pharm Agreement, which terminates on June 30,
2001, unless renewed, grants Cell Pharm rights to distribute, promote, and sell
ALFERON N Injection in Germany. The Cell Pharm Agreement provides that the
Company will supply Cell Pharm with ALFERON N Injection at specified prices, and
obligates Cell Pharm to purchase specified minimum amounts in each annual
period. In addition, Cell Pharm is required to pay the Company 50% of the
incremental revenue Cell Pharm receives as a result of selling ALFERON N
4
Injection at a price higher than a specified price. Cell Pharm is required to
maintain an active and efficient sales and customer service organization with
adequately trained personnel for marketing and selling ALFERON N Injection. Cell
Pharm represents to the Company that it has obtained, and Cell Pharm agrees to
maintain in effect, all registrations, approvals, and consents from governments
in Germany as are necessary to permit or facilitate the lawful handling,
promotion, and resale of ALFERON N Injection in Germany. Cell Pharm has informed
the Company that it intends to market ALFERON N Injection under the trade name
Cytoferon(TM), pursuant to Cell Pharm's existing regulatory approval to market
Cytoferon in Germany for the treatment of hairy cell leukemia and for the
treatment of patients who develop antibodies against recombinant alpha
interferons.
In February 1994, the Company entered into an exclusive distribution
agreement for ALFERON N Injection in Mexico with Industria Farmaceutica
Andromaco, S.A. de C.V. ("Andromaco"), a privately-held pharmaceutical company
headquartered in Mexico City which specializes in oncology and immunology
products. Pursuant to the agreement, Andromaco obtained approval from the
Mexican regulatory authorities to sell ALFERON N Injection for the treatment of
genital warts, which is marketed under the trade name ALTEMOL(R). The agreement
establishes performance milestones for the maintenance of distribution rights by
Andromaco in Mexico. In addition, the Company has a buy-out option to reacquire
the marketing and distribution rights in Mexico under certain terms and
conditions.
Manufacturing. The purified drug concentrate utilized in the
formulation of ALFERON N Injection is manufactured in the Company's facility
located in New Brunswick, New Jersey, and ALFERON N Injection is formulated and
packaged at a production facility located in McPherson, Kansas and operated by
Abbott Laboratories Inc. ("Abbott") pursuant to a processing and supply
agreement entered into in September 1994. Under the terms of the agreement with
Abbott, the Company pays Abbott an agreed price to formulate and package ALFERON
N Injection in accordance with specifications provided by the Company. The
Company's facilities received FDA approval in October 1989. Subsequently, the
Company developed process improvements and completed an expansion of its
manufacturing facility, both of which were approved by the FDA in June 1991. The
process improvements and expanded facility enabled the Company to reduce the
manufacturing costs of ALFERON N Injection and gave the Company increased
production capacity for ALFERON N Injection. Since the beginning of 1996, the
Company increased its physical manufacturing capacity by 50%. In anticipation
of increased demand, production of interferon was continued at a level in excess
of current market demand. In light of the results to date of the Company's
Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, the
Company has written-down the carrying value of its inventory of ALFERON N
Injection to its estimated net realizable value. The write-down is the result
of the Company's reassessment of anticipated near-term needs for product to be
sold or utilized in clinical trials (within approximately a two-year period at
historical sales levels). As a result, inventories at December 31, 1997 reflect
a reserve for excess inventory of $7,254,710. Also, during the quarter ending
March 31, 1998, the Company will record an additional write-off of approximately
$3,000,000 of inventories that were produced during the three months ended
March 31, 1998. At the present time, the Company has produced sufficient
inventory to satisfy its clinical and commercial needs for the foreseeable
future and has therefore discontinued production of ALFERON N Injection.
See "Business -- ALFERON N Injection -- Clinical Trials for New Indications,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -Governmental Regulation," and "Properties."
Competition. Presently, INTRON A, manufactured by Schering Plough Corp.
"Schering"), is the one other injectable interferon product approved by the FDA
for the treatment of genital warts. INTRON A is made from recombinant alpha
interferon. Since the production of INTRON A is not dependent on a source of
human blood cells, it may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, the Company's wholesale price on
a per unit basis of ALFERON N Injection is substantially higher than that of
INTRON A. In March 1997, 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of external genital and perianal warts. ALFERON N Injection also
competes with surgical, chemical, and other methods of treating genital warts.
The Company cannot assess the impact products developed by the Company's
competitors or advances in other methods of the treatment of genital warts will
have on the commercial viability of its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection and its proposed products (such as the approval obtained by
Cell Pharm in Germany), it expects to compete primarily on the basis of product
performance and price with a number of pharmaceutical companies, both in the
United States and abroad.
A number of synthetic antiviral compounds have been approved in the
United States and certain foreign countries for the treatment, primarily in
combination therapy, of HIV infection and AIDS, including reverse transcriptase
inhibitors (nucleoside analogues) such as Epivir(R) and Retrovir(R)
(manufactured by Glaxo Wellcome Inc.), Hivid(R) (manufactured by Roche
Laboratories, Inc.), and Zerit(R) and Videx(R) (manufactured by Bristol-Myers
5
Squibb Company) and protease inhibitors such as Crixivan(R) (manufactured by
Merck & Co., Inc.), Fortovase(R) and Invirase(R)(manufactured by Roche
Laboratories, Inc.), Norvir(R) (manufactured by Abbott Laboratories) and
Viracept(R) manufactured by Agouron Pharmaceutical, Inc. Also, Viramune(R), a
non-nucleoside reverse transcriptase inhibitor (manufactured by Boehringer
Ingelheim Corporation), and Rescriptor(R) manufactured by Pharmacia and Upjohn
Company, have been approved by the FDA for use in combination with nucleoside
analogues for the treatment of HIV-infected adults.
Schering's recombinant interferon product is already approved for the
treatment of hepatitis C and hepatitis B in the United States and other markets,
as well as for many other medical uses. Roche Pharmaceuticals's recombinant
interferon product has been approved for the treatment of hepatitis C in the
United States and for other medical uses in the United States and in foreign
countries. In addition, Amgen Inc.'s recombinant interferon, Infergen(R), also
known as consensus interferon product, was recently approved for the treatment
of hepatitis C in the United States.
In the United States, two recombinant forms of beta interferon, Biogen,
Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva Marion
Partners' Copaxone(R), a non-interferon product, have been approved for the
treatment of relapsing-remitting MS.
Many of the Company's potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources and
product development, manufacturing, and marketing capabilities than the Company
or its marketing partners. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of any additional diseases, it will be able to achieve any significant
penetration into those markets.
ALFERON N Gel
ALFERON N Gel is a topical, Natural Alpha Interferon preparation which
the Company has developed and believes has potential in the treatment of
cervical dysplasia, intravaginal warts, and mucocutaneous and genital herpes.
Clinical Trials. The Company has completed one clinical trial, has
commenced one clinical trial, and may conduct other clinical trials for its
ALFERON N Gel formulation to develop applications and obtain initial approvals
for such products.
Cervical Dysplasia and Intravaginal Warts. Affecting approximately
500,000 to one million women each year in the United States alone, cervical
dysplasia, or abnormal cervical cells, has been identified as a potential
precursor to cervical cancer. Cervical cancer strikes approximately 13,000 women
in the United States each year, causing 5,000 deaths, and is responsible for
more than half a million deaths worldwide. Cervical dysplasia is caused by
certain strains of the human papillomavirus ("HPV"), the same family of viruses
that causes genital warts. The Company has completed a small Phase 2
dose-ranging study using ALFERON N Gel at the Columbia-Presbyterian Medical
Center in New York for the treatment of mild cervical dysplasia. Pap smears,
identification tests for the presence of virus, and cervical biopsies indicated
that ALFERON N Gel appears to have the potential for improving the course of
cervical dysplasia in the majority of patients who completed the treatment
course. In addition, an investigator-sponsored, Phase 2 randomized,
placebo-controlled, double-blind, parallel group clinical study to investigate
the potential use of ALFERON N Gel for the treatment of intravaginal warts
(which are also caused by the HPV) commenced in January 1998.
Other Widespread Dermatological Lesions Potentially Treatable with
ALFERON N Gel Therapy. Nearly 30 million people in the U.S. are infected with
the herpes simplex type II virus, which is the infectious virus that causes
genital herpes. Up to 500,000 new cases are reported each year, according to the
Alan Guttmacher Institute. To date, there is no cure for genital herpes.
Preliminary findings with a previous formulation of recombinant interferon in
the Company's proprietary gel showed significant shortening of the contagious
period and relief of symptoms, but the Company will not start clinical trials
unless additional funding or a sponsor is secured.
ALFERON N Gel may also be of benefit to immunocompromised patients with
mucocutaneous herpes. Patients with this form of herpes suffer from persistent
skin lesions which have become resistant to existing therapies. The Company will
not start clinical trials for this indication unless additional funding or a
sponsor is secured.
Marketing and Distribution. The Company does not have any marketing
agreement with respect to ALFERON N Gel and, if FDA approval is obtained, no
assurance can be given that the Company will be able to enter into a marketing
agreement on terms satisfactory to the Company. The Company may also choose to
market ALFERON N Gel itself if FDA approval is obtained.
6
Competition. The Company believes that three antiviral products are
presently sold in the United States for the treatment of recurrent genital
herpes: Zovirax(R) (manufactured by Glaxo Wellcome Inc.) which contains
acyclovir and is administered orally, topically, or intravenously, Famvir(R)
(manufactured by SmithKline Beecham Pharmaceuticals) which contains famcyclovir
and is administered orally, and Valtrex(R) (manufactured by Glaxo Wellcome,
Inc.) which contains valacyclovir and is also administered orally. The only
current treatment for cervical dysplasia in the United States is surgery, while
intravaginal warts are treated with ablative therapy.
ALFERON LDO
ALFERON LDO is a low dose oral liquid Natural Alpha Interferon
preparation which the Company has developed and believes has potential in the
treatment of several quality-of-life parameters of importance to patients
infected with HIV.
Clinical Trials for ALFERON LDO. As described below, the Company has
completed two Phase 2 clinical trials for its ALFERON LDO formulation for the
treatment of HIV-infected patients. In addition, a National Institute of Allergy
and Infectious Diseases ("NIAID") sponsored Phase 3 trial in HIV-infected
patients has been concluded in which ALFERON LDO was included as one of the
treatments.
HIV-infected patients. The Company has completed two double-blind studies
at Mount Sinai Medical Center in New York involving ALFERON LDO. One was a
placebo-controlled study in AIDS-related complex ("ARC") patients, and the other
was a dose ranging study in AIDS or ARC patients. The results from the
placebo-controlled study did not demonstrate a significant improvement or
alteration in the expected progression of the disease, although patients
receiving ALFERON LDO reported greater energy and appetite than those given the
placebo. The results from the dose ranging study indicate that one of the doses
may promote weight gain and an increase in energy and overall well-being.
At the insistence of AIDS groups and community-based physicians who had
been using low-dose oral formulations of interferon in their practice, the NIAID
launched in the second quarter of 1996 a Phase 3 trial of three preparations of
low-dose oral interferon, including ALFERON LDO. An advisory committee comprised
of representatives from the Company and other interferon manufacturers, AIDS
support groups, the FDA, and the National Institutes of Health was organized to
design this multicenter study, which is examining the effectiveness of low dose
oral alpha interferon therapy on several quality-of-life parameters of
importance to patients infected with HIV. Patients enrolled in the study were
randomly assigned to one of four treatment groups, with all participants
receiving three compounds. In three of the groups, patients received one active
compound and two placebos. Patients in the fourth group received only placebos.
Neither the physician nor the patient will know which group the patient was
assigned to until after the study, which had a six-month treatment phase and
six-month follow-up period, has ended and the analysis is completed. While in
the study, patients were permitted to take antiretroviral drugs and therapies
against opportunistic infections. In June 1997, NIAID terminated enrollment in
this study because of the slow rate of patient accrual. NIAID will analyze and
publish the results of the completed patients when available. The Company has
provided clinical quantities of ALFERON LDO for use in the study.
Marketing and Distribution. The Company does not have a marketing
agreement with respect to ALFERON LDO and, if FDA approval of ALFERON LDO is
obtained, no assurance can be given that the Company will be able to enter into
a marketing agreement for such products on terms satisfactory to the Company.
The Company may also choose to market ALFERON LDO itself if FDA approval is
obtained.
Competition. Under the terms of a licensing agreement (as amended, the
"Amarillo Agreement") with Amarillo Bioscience, Inc. (formerly Amarillo Cell
Culture Company, Incorporated) ("Amarillo") (i) the Company has the exclusive
right to sell ALFERON LDO, containing Natural Alpha Interferon, in the United
States and all foreign countries other than Japan, (ii) Amarillo and Pharma
Pacific Management Pty. Ltd. ("PPM"), a company which has also obtained a
license from Amarillo, each has the right to sell any interferon other than
Natural Alpha Interferon in the United States and all foreign countries other
than Japan, and (iii) Hayashibara Biochemical Laboratory has the right to sell
its low dose alpha interferon in Japan. See "Business -- Licenses and Royalty
Obligations." Therefore, with respect to low dose oral interferon products, the
Company will potentially compete with Amarillo and PPM in the United States and
in the rest of the world except Japan and with Hayashibara Biochemical
Laboratory in Japan. In addition, the Company will potentially compete with the
manufacturers of the synthetic antiviral compounds that have been approved in
the United States and certain foreign countries for the treatment of HIV and
AIDS. (See "Business -- ALFERON N Injection -- Competition").
7
Patents
In 1996, the Company was issued a United States patent, comprised of 15
claims, for Natural Alpha Interferon. The two major claims are for (i) a
highly purified Natural Alpha Interferon composition produced from human
peripheral blood leukocytes and (ii) an improved method to produce this
composition. The issuance of this patent gives the Company protection for the
manufacture, use, and sale of its Natural Alpha Interferon product in the United
States and prevents a competitor from producing or using equivalent products
derived from human peripheral blood leukocytes. Patent applications have also
been filed in selected foreign countries. In the fourth quarter of 1997, the
Company was issued a second United States patent which broadens the scope of the
first one to cover certain individual or mixtures of alpha interferon species
present in Natural Alpha Interferon.
Also in 1996, the Company was issued a United States patent, comprised
of four claims, that will expand the Company's portfolio on overall technologies
in the interferon field. The biological activities of interferon take place when
the interferon binds to Type 1 interferon receptor proteins, which are present
in various human cells. The major claim is the composition claim for an
interferon receptor protein specifically binding alpha and beta, but not gamma,
interferon. The receptor, which is isolated from a cancerous cell line, binds
both natural and recombinant alpha interferons and is a variant form of the
human interferon receptor (Type 1) which has been found in some cases of acute
leukemia. The claimed receptor protein could be used to produce anti-receptor
antibodies that may have potential use in diagnostic testing for tumors or
cancers which have an abnormal number of receptors. The claimed receptor protein
may also have potential use as a therapeutic agent for those diseases which have
aberrant production of interferon, by binding to and neutralizing the excess
interferon.
The United States Patent and Trademark Office has also issued two
patents to the Company which disclose and claim topical interferon preparations.
The patents encompass interferon preparations for the topical delivery of one or
more interferons to the site of a disease which responds therapeutically to
interferon, and a system for delivering interferon topically which prevents
oxidation of the protein. The inventions specifically encompass the topical
treatment for treating viral diseases, such as herpes genitalis, with alpha
interferon. The Company has various other issued patents and patent applications
pending in the field of biotechnology, purification processes, and therapeutics.
Licenses and Royalty Obligations
F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. As of March 31, 1995, the Company obtained a
non-exclusive perpetual license from Hoffmann (the "Hoffmann Agreement") which
grants the Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann, any formulation of Natural
Alpha Interferon. The Hoffmann Agreement replaced a 1988 non-exclusive license
which, as amended, granted the Company the right to make, use, and sell in the
United States, without a potential patent infringement claim from Hoffmann,
injectable formulations of Natural Alpha Interferon for the treatment of genital
warts or patients with diseases refractory to recombinant interferon therapy.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. The Hoffmann Agreement can be terminated by the Company on 30 days'
notice with respect to the United States patent, any individual foreign patent,
or all patents owned by Hoffmann. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. When the Company received FDA
approval for ALFERON N Injection for the treatment of genital warts in 1989, the
Company became obligated to issue shares of its Common Stock to Hoffmann as a
prepaid royalty against future net sales by the Company. Under the terms of the
8
Hoffmann Agreement, certain payments previously made to Hoffmann (including a
portion of the value of the Common Stock previously issued to Hoffmann) are
available as offsets against 50% of the Company's future royalty obligations to
Hoffmann until the Company obtains an FDA approval to market ALFERON N Injection
for an additional indication. For the years ended December 31, 1997, 1996 and
1995, the Company applied $117,102, $77,584 and $50,437 respectively, of the
prepayments previously made to Hoffmann against the amounts due. As of December
31, 1997, based upon the market value of the Company's common stock, the Company
had approximately $698,200 of credits available to offset its future royalty
obligations to Hoffmann.
In October 1989, the Company entered into the Amarillo Agreement.
Amarillo, which is located in Amarillo, Texas, is in the business of the
research and development of animal health products and became a public company
in 1996. Under the terms of the Amarillo Agreement, the Company has a
non-exclusive license under all of Amarillo's issued patents, patent
applications, and "know-how" relating to the treatment of humans by the oral
administration of Natural Alpha Interferon in low doses. In addition, Amarillo
has the right to purchase the Company's Natural Alpha Interferon for use in the
animal health market and is obligated to pay royalties to the Company based upon
sales using the Company's Natural Alpha Interferon.
The Company will be obligated to pay Amarillo royalties of 10% on the
sales of Natural Alpha Interferon products using Amarillo's patented technology
as determined under the Amarillo Agreement. In addition, the Company is a party
to certain license agreements, including the Hoffmann Agreement, pursuant to
which it is obligated to pay royalties based upon commercial exploitation of
ALFERON N Gel and ALFERON LDO. Under the terms of such license agreements, the
Company would pay royalties of up to 13.5% and 19.5% of net sales of ALFERON N
Gel and ALFERON LDO, respectively.
In addition, the Company agreed to pay G.P. Strategies Corporation
("G.P. Strategies"), formerly named National Patent Development Corporation, a
royalty of $1 million in connection with the acquisition of certain
intellectual property and technology rights from G.P. Strategies. Such amount
is payable if and when the Company generates income before taxes, limited to 25%
of such income before income taxes per year until the amount is paid in full.
Governmental Regulation
Regulations imposed by U.S. federal, state, and local authorities, as
well as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing, and marketing activities
for present and proposed products developed by the Company.
The Company's or its licensees' potential products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human medical products are subject to rigorous pre-clinical and
clinical testing and other approval procedures by the FDA in the United States
and similar health authorities in foreign countries. Various federal and, in
some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping, and marketing of such
products, including the use, manufacture, storage, handling, and disposal of
hazardous materials and certain waste products. The process of obtaining these
approvals and the subsequent compliance with applicable federal and foreign
statutes and regulations involves a time-consuming process and requires the
expenditure of substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or impose costly procedures on the Company's activities, the result
of which may be to furnish an advantage to the Company's competitors. Any delay
in obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product revenue.
Before testing of any agents with potential therapeutic value in
healthy human test subjects or patients may begin, stringent government
requirements for pre-clinical data must be satisfied. These data, obtained from
studies in several animal species, as well as from laboratory studies, are
submitted in a Notice of Claimed Investigational Exemption for a New Drug or its
equivalent in countries outside the U.S. where clinical studies are to be
conducted. If the necessary authorizations are received, the Company then
conducts clinical tests of its products on human beings at various unaffiliated
medical centers and institutions. Initial trials (Phase 1) are conducted on a
small number of volunteers to determine whether the drug is safe for human
beings. If the initial trials demonstrate the safety of the product, trials
(Phase 2) are then conducted on patients affected with the disease or condition
under investigation to establish the proper dose and dosing interval. The
findings of these trials are then used to design and implement large-scale
controlled trials (Phase 3) to provide statistical proof of effectiveness and
adequate evidence of safety to meet FDA and/or foreign approval requirements.
9
The FDA closely monitors the progress of each of the phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based on the data which have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company typically
submits a New Drug Application ("NDA"), or for biological products such as
Natural Alpha Interferon, a Product and Establishment License Applications
("PLA/ELA") to the FDA summarizing the results and observations of the drugs
during the clinical trials.
Each facility in which products are produced and packaged, whether
operated by the Company or a third party, must meet the FDA's standards for
current good manufacturing practices and must also be approved prior to
marketing any product produced or packaged in such facility. Any significant
change in the production process which may be commercially required, including
changes in sources of certain raw materials, or any change in the location of
the production facilities will also require FDA approval. To the extent a
portion of the manufacturing process for a product is handled by an entity other
than the Company, the Company must similarly receive FDA approval for the other
entity's participation in the manufacturing process. The Company has entered
into an agreement with Abbott, pursuant to which Abbott formulates and packages
ALFERON N Injection. The Company presently has a biologic establishment license
for the facilities in which it produces ALFERON N Injection, which includes the
facilities in which Abbott formulates and packages ALFERON N Injection. In
addition, FDA approval would have to be obtained if the Company should choose to
use an outside formulator and/or packager for ALFERON N Gel or ALFERON LDO.
Once the manufacture and sale of a product is approved, various FDA
regulations govern the production processes and marketing activities of such
product. A post-marketing testing, surveillance, and reporting program may be
required to monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must be tested
for compliance with specifications and released for sale by the FDA prior to
distribution in the marketplace. Even after initial FDA marketing approval for a
product has been granted, further studies may be required to provide additional
data on safety or efficacy; to obtain approval for marketing a product as a
treatment for specific diseases other than those for which the product was
originally approved; to change the dosage levels of a product; to support new
safety or efficacy claims for the product; or to support changes in
manufacturing methods, facilities, sources of raw materials, or packaging.
In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial, or institutional formularies or cost
reimbursement systems. The impact of new or changed laws or regulations cannot
be predicted with any accuracy. The Company uses its own staff of regulatory
affairs professionals and outside consultants to enable it to monitor
compliance, not only with FDA laws and regulations, but also with state and
foreign government laws and regulations.
Promotional and educational communications by the Company and its
distributors also are regulated by the FDA and are governed by statutory and
regulatory restrictions and FDA policies regarding the type and extent of data
necessary to support claims that may be made. The Company currently does not
have data adequate to satisfy FDA requirements with respect to potential
comparative claims between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials,
manufacturing, and marketing approval for drugs and other medical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. In addition to
its United States approval, ALFERON N Injection has received regulatory approval
in Mexico, Germany, Hong Kong, and Singapore, and registration filings have been
submitted in certain other countries.
Under certain circumstances, the Company may be required to obtain FDA
authorization to export products for sale in foreign countries. For instance, in
most cases, the Company may not export products that have not been approved by
the FDA unless it first obtains an export permit from the FDA. However, these
FDA export restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are manufactured
outside the United States. At the present time, the Company does not have any
foreign manufacturing facilities.
10
Research Staff and Employees
As of April 8, 1998, the Company had approximately 100 full-time
employees, of whom 14 hold Ph.D. degrees, 1 holds an M.D. degree and 52 hold
other degrees in scientific or technical fields. Of such employees,
approximately 21 were engaged in research and product development, 40 were
engaged in quality control and product and process improvement for
manufacturing, 9 were engaged in engineering, maintenance and regulatory and
quality assurance, 6 were engaged in medical affairs and the remainder were
general and administrative personnel.
Research and Development
During the fiscal years ended December 31, 1997, 1996, and 1995, the
Company expended approximately $11.9 million, $6.4 million, and $3.7 million,
respectively for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
Executive Officers of the Registrant
The following table sets forth the names of the principal executive
officers of the Company as of March 15, 1998 and their positions with the
Company. The principal business experience of the executive officers for the
last five years is also described below.
Name Age Position
- ---- --- --------
Samuel H. Ronel, Ph.D 61 Chairman of the Board
Lawrence M. Gordon 44 Chief Executive Officer and a
Director
Stanley G. Schutzbank, Ph.D. 52 President and a Director
Donald W. Anderson 48 Controller (Principal
Accounting and Financial
Officer) and Secretary
Drew Stoudt 50 Vice President, Regulatory
Affairs and Quality
Mei-June Liao, Ph.D. 46 Vice President, Research and
Development
James R. Knill, M.D. 65 Vice President, Medical Affairs
Robert P. Hansen 54 Vice President, Manufacturing
Samuel H. Ronel, Ph.D. has been Chairman of the Board since February
1997 and was Vice Chairman of the Board from January 1996 to February 1997 and
President, Chief Executive Officer, and a director of the Company from 1981 to
January 1996. He was responsible for the interferon research and development
program since its inception in 1979. Dr. Ronel joined G.P. Strategies in 1970
and served as the Vice President of Research and Development of G.P. Strategies
and as the President of Hydro Med Sciences, a division of G.P. Strategies, from
1976 to September 1996. Dr. Ronel served as President of the Association of
Biotechnology Companies, an international organization representing United
States and foreign biotechnology firms, from 1986-88 and has served as a member
of its Board of Directors until 1993. Dr. Ronel was elected to the Board of
Directors of The Biotechnology Industry Organization from 1993 to 1995 and to
the Governing Body of the Emerging Companies Section from 1993 to 1997.
Lawrence M. Gordon has been Chief Executive Officer and a director of
the Company since January 1996, Vice President of the Company from June 1991 to
January 1996, General Counsel of the Company from 1984 to January 1996, General
Counsel of G.P. Strategies since November 1986, and Vice President of G.P.
Strategies from June 1991 to September 1996. He was Associate General Counsel of
G.P. Strategies from 1983 through November 1986.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1981 to January 1996,
and a director of the Company since 1981 and has been associated with the
interferon research and development program since its inception in 1979. He is
involved with all facets of administration and planning of the Company and has
coordinated compliance with FDA regulations governing manufacturing and clinical
testing of interferon, leading to the approval of ALFERON N Injection in 1989.
Dr. Schutzbank joined G.P. Strategies in 1972 and served as the Corporate
Director of Regulatory and Clinical Affairs of G.P. Strategies from 1976 to
September 1996 and as Executive Vice President of Hydro Med Sciences from 1982
to September 1996. Dr. Schutzbank is a member of the Regulatory Affairs
11
Professionals Society and has served as Chairman of the Regulatory Affairs
Certification Board from its inception until 1994. Dr. Schutzbank received the
1991 Richard E. Greco Regulatory Affairs Professional of the Year Award for his
leadership in developing the United States Regulatory Affairs Certification
Program. In September 1995, Dr. Schutzbank was elected to serve as
President-elect in 1996, President in 1997, and Chairman of the Board in 1998 of
the Regulatory Affairs Professionals Society.
Donald W. Anderson has been the Controller of the Company since 1981
and Corporate Secretary of the Company since 1988. He was an officer of various
subsidiaries of G.P. Strategies from 1976 to September 1996.
Drew Stoudt has been Vice President, Regulatory Affairs and Quality
of the Company since March 1991. He was Vice President, Quality Assurance and
Quality Control from February 1990 to March 1991. Mr. Stoudt has served as
Director of Quality Assurance for the Company and other divisions of G.P.
Strategies from 1985 to 1990. Mr. Stoudt is a member of the Regulatory Affairs
Professionals Society and received the 1988 Richard e. Greco Regulatory Affairs
Professional of the Year Award. In addition, in 1997, Mr. Stoudt was elected
to a three-year term as Treasurer of this Society.
Mei-June Liao, Ph.D. has been Vice President, Research and Development
of the Company since March 1995. She has served as a Director, Research &
Development since 1987, and held senior positions in the Company's Research &
Development Department since 1983. Dr. Liao received her Ph.D. from Yale
University and completed a three-year post doctoral appointment at the
Massachusetts Institute of Technology under the direction of Nobel Laureate in
Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific
publications and invention disclosures.
James R. Knill, M.D. has been Vice President, Medical Affairs of the
Company since September 1996 and a consultant to the Company from November 1995
to September 1996. Dr. Knill was employed as Vice President of Medical Affairs
for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen
Corporation from 1995 to July 1996. He was previously employed for more than 20
years as Vice President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the Company
since February 1997. He served as a Director of Manufacturing since 1995, and
held senior positions in the Company's Manufacturing Department since 1987.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
All of the Company's material operations and sales are conducted in the
United States.
Item 2. Properties
The Company's executive offices and its research and production
facilities are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901,
and its telephone number is (732) 249-3250. The Company also maintains offices
at 9 West 57th Street, New York, New York 10019, the cost of which is included
in the Management Agreement. See Note 1 of Notes to Consolidated Financial
Statements.
The Company owns two free standing buildings comprising approximately
44,000 square feet and leases another 10,000 square feet all of which is located
in New Brunswick, New Jersey. The Company uses the facilities for staff offices,
for the production and purification of interferon, for quality control and
research activities, and for the storage of raw, in process and finished
materials.
The Company believes that its current facilities and equipment are
suitable and adequate for research and development and commercial production of
purified interferon, well maintained, and in good condition.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Common Stock is traded in the over-the counter market and is quoted
on the NASDAQ National Market System under the symbol IFSC. Effective June 17,
1997, the trading market for the Common Stock was changed from the NASDAQ Small
Cap Market to the NASDAQ National Market System. The following table sets forth
for each period indicated, the high and low sales prices for the Common Stock as
reported on the NASDAQ Small Cap Market through June 16, 1997 and on the NASDAQ
National Market System commencing June 17, 1997. All prices have been adjusted
for a one-for-four reverse stock split that became effective as of 5:00 p.m. New
York City time on March 21, 1997.
1997 1996
------------ -----------
Quarter High Low High Low
- ------- ---- --- ---- ---
First....... $11 $ 5 3/8 $ 10 1/4 $ 6
Second.... 9 5/8 4 1/2 12 7 1/4
Third...... 9 1/2 6 8 1/4 4 1/2
Fourth..... 11 3/16 7 1/2 7 7/8 3 1/2
As of March 12, 1998, the Company had 350 stockholders of record.
The Company has not paid any dividends on the Common Stock since its
inception and does not contemplate paying dividends on the Common Stock in the
foreseeable future.
On August 18, 1997, the Company completed the private placement
primarily to institutional investors of 1,936,667 shares of Common Stock.
The Company received aggregate cash consideration of $11,620,002. Sunrise
Securities Corp. ("Sunrise") acted as placement agent and in connection
therewith received a commission of 116,200 shares of Common Stock and options to
purchase 96,833 shares of Common Stock at a purchase price of $7.20 per share.
The options are exercisable for a period of four years, commencing on August 18,
1998, and cannot be sold, transferred, assigned, or hypothecated until such
date, except that they may be assigned, in whole or in part, to any successor,
officer, or partner of Sunrise. Sunrise also received an unaccountable expense
allowance of 38,733 shares of Common Stock. The private placement and the
issuance of shares and options to designees of Sunrise were made in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") for a transaction by an issuer not involving any public
offering and/or Rule 506 of Regulation D promulgated under the Securities Act.
13
Item 6. Selected Financial Data
(Thousands of dollars except per share data)
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 2,956 $ 2,092 $ 1,296 $ 1,166 $ 51
Research and development
costs, net 11,864 6,400 3,726 5,196 4,151
General and administrative
expense 4,389 3,405 1,940 4,974 2,367
Loss from operations* (22,410) (12,426) (7,447) (11,782) (8,347)
Interest income (expense), net 670 441 75 (295) (113)
Net loss* (21,740) (11,986) (7,372) (12,078) (8,460)
Basic and diluted loss per
share of common stock** (1.63) (1.20) (1.11) (2.47) (2.19)
Dividends NONE NONE NONE NONE NONE
- ----------------------------------
[FN]
*Includes a provision for excess inventory of $7.3 million in 1997.
**All Periods have been restated to reflect the effect of the one-for-four
reverse stock split that became effective as of 5:00 p.m. New York City time on
March 21, 1997 (see Note 11 to the Consolidated Financial Statements).
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets $ 24,153 $ 27,743 $ 13,953 $ 8,182 $ 20,301
Current maturities of
long-term debt -- -- -- 409 1,999
Long-term debt, net of
current maturities -- -- -- -- 138
Common Stock subject to
repurchase commitment -- -- -- 2,730 --
Working capital (deficiency) 14,529 19,929 7,062 (782) 7,985
Stockholders' equity 20,214 25,374 12,827 2,979 17,131
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Since January 1981, the Company has been primarily engaged in the
research and development of pharmaceutical products containing Natural Alpha
Interferon. The Company has experienced significant operating losses since its
inception. Although the Company received FDA approval in October 1989 to market
ALFERON N Injection in the United States for the treatment of certain genital
warts and ALFERON N Injection currently is marketed and sold in the United
States by the Company, in Mexico by Andromaco, and in Germany by Cell Pharm, the
Company has had limited revenues from the sale of ALFERON N Injection to date.
For the Company to operate profitably, the Company must sell significantly more
ALFERON N Injection. Increased sales will depend primarily upon the expansion of
existing markets and/or successful attainment of FDA approval to market ALFERON
N Injection for additional indications. The future revenues and profitability
of, and availability of capital for, biotechnology companies may be affected by
the continuing efforts of governmental and third-party payors to contain or
reduce the costs of health care through various means. The Company has limited
financial resources with which to support future operating activities and to
satisfy its financial obligations as they become payable. Consequently,
management is continuing to actively pursue raising additional capital by either
(i) issuing securities in a public or private equity offering, (ii) licensing
the rights to its injectable, topical or oral formulations of alpha interferon,
or (iii) entering into collaborative or other arrangements with corporate
partners. The Company has primarily financed its operations to date through
private placements and public offerings of the Company's securities. This may
be more difficult in the future in light of the results to date of the Company's
Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients. See
"Business - ALFERON N Injection - Clinical Trials for New Indications." All per
share amounts have been adjusted for a one-for-four reverse stock split that
became effective as of 5:00 p.m. New York City time on March 21, 1997.
Liquidity and Capital Resources
As of April 10, 1998, the Company had an aggregate of $7.2 million in
cash and cash equivalents. Until utilized, such cash and cash equivalents are
being invested principally in short-term interest-bearing investments.
The Company requires substantial funds to conduct research and
development and pre-clinical and clinical testing and to market its products.
For the year ended December 31, 1997, the cash utilized by the Company's
operations was approximately 19.0 million of which increases in inventories and
accounts and other receivables accounted for approximately $6.3 and $0.8
million, respectively. The Company had continued to increase its investment in
inventories of ALFERON N Injection to meet anticipated increases in market
demand, for use in the Company-sponsored Phase 3 and Phase 2 clinical trials,
and so that inventory would be available in the event ALFERON N Injection was
subsequently approved for the treatment of HIV or hepatitis C or both by the
U.S. Food and Drug Administration. In light of the results to date of the
Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected
patients, the Company has determined that it has enough inventory on hand
to satisfy its clinical and commercial needs for the foreseeable future
and therefore discontinued production of ALFERON N Injection in April 1998. The
Company currently obtains human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the American Red Cross
pursuant to a supply agreement dated April 1, 1997. The Company will not need
more human white blood cells until such time as production of ALFERON N
Injection is resumed. Under the terms of the agreement with the American Red
Cross, the Company is obligated to purchase a minimum of 18,000 buffy coats of
human white blood cells each month through March 1999, at a price per buffy coat
of $14.50. The Company hopes to renegotiate the minimum purchase commitment, but
if it is unable to do so such obligation may have a material adverse effect on
the financial condition of the Company. For the years ended December 31, 1996
and 1995, the cash utilized by the Company's operations was approximately $13.3
million and $7.1 million, respectively. The Company's future capital
requirements will depend on many factors, including: continued scientific
progress in its drug development programs; the magnitude of these programs;
progress with pre-clinical testing and clinical trials; the time and costs
involved in obtaining regulatory approvals; the costs involved in filing,
prosecuting, and enforcing patent claims; competing technologies and market
developments; changes in its existing research relationships; and the
ability of the Company to establish collaborative arrangements and
effective commercialization activities and arrangements.
The Company anticipates that the cash that will be utilized by the
Company's operations in 1998 will be significantly less than in 1997 as a
result of the discontinuance in April 1998 of manufacturing, the conclusion in
1998 of the Company's Phase 3 studies of ALFERON N Injection in HIV- and
HCV-infected patients, and certain other cost reductions instituted in 1998
by the Company, offset in part by the expenses associated with the HIV and
hepatitis C co-infection study that commenced in December 1997. Based on the
Company's estimates of revenues, expenses, and levels of production, management
believes that the cash presently available will be sufficient to enable the
15
Company to continue operations through approximately September 1998. However,
actual results, especially with respect to revenues, may differ materially from
such estimates, and no assurance can be given that additional funding will not
be required sooner than anticipated or that such additional funding,
whether from financial markets or collaborative or other arrangements with
corporate partners or from other sources, will be available when needed or on
terms acceptable to the Company. Insufficient funds will require the Company
to further delay, scale back, or eliminate certain or all of its research and
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. The
Independent Auditors' Report dated April 2, 1998 on the Company's consolidated
financial statements notes that the Company has suffered recurring losses from
operations and has an accumulated deficit that raise substantial doubt about its
ability to continue as a going concern.
During the second half of 1997, the Company received net proceeds of
approximately $16.4 million from public and private stock offerings,
primarily to institutional investors, of the Company's common stock.
On December 24, 1996, the Company sold in a private placement (the
"December 1996 Private Placement") 1,403,750 shares of Common Stock at a price
of $6.50 per share. The $9,124,375 of proceeds from such sale (less expenses of
$61,300 excluding the impact of shares of common stock and warrants issued to
the placement agent as additional compensation) were used (i) to increase the
Company's inventory of ALFERON N Injection, (ii) to fund the Company's clinical
programs, and (iii) to increase the Company's marketing and sales capabilities.
On May 2, 1996, the Company completed the sale of 2,000,000 shares of
Common Stock for an aggregate of $16,000,000 (the "May 1996 Offering"). Of the
net proceeds of $14,453,000 from the May 1996 Offering, the Company used an
aggregate of $3,760,012 to pay Purdue, approximately $6,000,000 for research,
product development and clinical trials of the Company's products and the
balance for working capital and general corporate purposes.
In August and September 1995, the Company completed the sale of
3,000,000 shares of Common Stock for an aggregate of $14,400,000 (the
"August/September 1995 Offering"). Of the $12,494,000 of net proceeds from the
August/September 1995 Offering, the Company used $1,870,000 to repay
indebtedness to certain principal stockholders, approximately $7,000,000 for
research, product development, and clinical trials of the Company's products and
the balance for working capital and general corporate purposes.
Between May and August 1995, three principal stockholders of the
Company loaned the Company an aggregate of $1,870,000. Such loans bore interest
at prime plus 2% and were repaid with a portion of the proceeds of the
August/September 1995 Offering.
In 1995, Amarillo and Pharma Pacific Management Pty. Ltd. agreed to
purchase an aggregate of $750,000 of Common Stock at $8.00 per share, all of
which cash was received during the second quarter of 1995.
In connection with the Fujimoto Agreement, in the first quarter of 1995
Fujimoto purchased $1,500,000 of Common Stock at $5.80 per share (the then
market price) and agreed to purchase an additional $500,000 of Common Stock on
February 6, 1996 at the then market price. During January 1996, Fujimoto advised
the Company that, to date, it had incurred higher than anticipated development
expenses, and that it had determined that there may be greater difficulties in
obtaining Japanese regulatory approval than originally anticipated. Fujimoto
therefore requested that the Company renegotiate such investment agreement, and
the Company met with Fujimoto to consider its request. As a result of such
meeting, during the third quarter of 1996 Fujimoto purchased the additional
$500,000 of Common Stock originally scheduled for purchase on February 6, 1996
and reimbursed the Company $133,000 for the cancellation of a prior commitment
to purchase ALFERON N Injection. The $133,000 was recorded as other revenues in
the third quarter of 1996. In March, 1997, Fujimoto and the Company terminated
the Fujimoto Agreement.
In 1988, the Company entered into exclusive marketing and distribution
agreements with Purdue with respect to ALFERON N Injection. The Company
reacquired from Purdue in 1993 and 1994 all except United States and Canadian
marketing rights. In January 1994, the Company assumed sole responsibility to
conduct and fund clinical trials required to obtain FDA approval for additional
indications for ALFERON N Injection. Prior to these amendments, Purdue was
responsible for the payment of the costs of such clinical trials. In May 1996,
the Company reacquired the United States and Canadian marketing rights from
Purdue for $3,313,705, which was charged to expense in the second quarter of
1996. In connection with the reacquisition of United States and Canadian
marketing rights (i) Purdue agreed to provide during the first year after the
reacquisition certain distribution services to the Company with respect to
16
24,000 vials of ALFERON N Injection at an aggregate cost of $240,000, (ii)
Purdue agreed to provide during the second year after the reacquisition, if
requested by the Company, certain distribution services to the Company with
respect to up to 30,000 vials of ALFERON N Injection at a cost of $15 per vial,
and (iii) the Company purchased from Purdue all vials of ALFERON N Injection and
all other assets of Purdue used exclusively in its ALFERON N Injection business
at an aggregate cost of $206,307. The Company believes that while the
reacquisition of marketing rights from Purdue will increase the Company's future
capital requirements, such reacquisition provides it with greater financial
flexibility and control over the distribution of ALFERON N Injection. See
"Business -- ALFERON N Injection -- Marketing and Distribution."
Results of Operations
Year Ended December 31, 1997 versus Year Ended December 31, 1996
For the year ended December 31, 1997 (the "1997 Period"), the Company's
revenues of $2,955,802 included $2,927,585 from the sale of ALFERON N Injection
and the balance from sales of research products and other revenues. Revenues of
$2,091,907 for the year ended December 31, 1996 (the "1996 Period") included
$1,939,595 from the sale of ALFERON N Injection and the balance from sales of
research products and revenues resulting from the cancellation of a prior
commitment to purchase ALFERON N Injection. There were no sales to Purdue during
the 1996 Period because the Company was negotiating the reacquisition of United
States and Canadian marketing rights from Purdue and Purdue had adequate
inventory from which to make sales pending the consummation of such
reacquisition, which took place during May 1996. Cost of goods sold and
excess/idle production costs totalled $1,857,959 and $1,399,610 for the 1997
Period and 1996 Period, respectively. In light of the results to date of the
Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected
patients, the Company has written-down the carrying value of its inventory of
ALFERON N Injection to its estimated net realizable value. The write-down is a
result of the Company's reassessment of anticipated near-term needs for product
to be sold or utilized in clinical trials (within approximately a two-year
period based on historical sales levels). As a result, a provision for excess
inventory was established in 1997 for $7,254,710. Substantially all of the
of the inventory which was sold during the 1996 Period had previously been
written-down to its then net realizable value. Excess/idle production costs in
the 1996 Period represented current production costs in excess of the estimated
net realizable value of the inventory produced.
Research and development expenses during the 1997 Period of $11,863,987
increased by $5,463,674 from $6,400,313 for the 1996 Period, principally because
the Company continued to intensify its level of clinical research on ALFERON N
Injection. The Company received $234,996 and $258,984 during the 1997 Period and
1996 Period, respectively, as rental income from G.P. Strategies for the use of
a portion of the Company's facilities, which offset research and development
expenses.
General and administrative expenses for the 1997 Period were $4,389,025
as compared to $3,404,578 (which includes non-recurring compensation expenses of
approximately $768,000) for the 1996 Period. The increase in the 1997 Period was
principally due to increases in marketing expenses of approximately $900,000
and, to a lesser extent, increases in payroll and other operating expenses. G.P.
Strategies provides certain administrative services for which the Company paid
G.P. Strategies $120,000 for each of the 1997 Period and 1996 Period. In
addition, for the 1997 Period and 1996 Period, the Company reimbursed G.P.
Strategies zero and $195,000, respectively, for expenses paid by G.P. Strategies
on behalf of the Company. For the 1997 Period and 1996 Period, payments to G.P.
Strategies for the services provided to the Company by G.P. Strategies personnel
amounted to $135,000 and $154,758, respectively. For the 1997 Period and 1996
Period, receipts from G.P. Strategies for the services provided to G.P.
Strategies by Company personnel amounted to zero and $351,759, respectively.
The $3,313,705 cost of reacquisition of marketing rights from Purdue
was charged to expense in the second quarter of 1996.
Interest income for the 1997 Period was $670,199 as compared to
$440,755 for the 1996 Period. The increase of $229,444 was due to more funds
available for investment in the current Period.
As a result of the foregoing, the Company incurred net losses of
$21,739,680 and $11,985,544 for the 1997 Period and 1996 Period, respectively.
Year Ended December 31, 1996 versus Year Ended December 31, 1995
For the 1996 Period, the Company's revenues of $2,091,907 included
$1,939,595 from the sale of ALFERON N Injection and the balance from sales of
research products and revenues resulting from the cancellation of a prior
commitment to purchase ALFERON N Injection. Revenues of $1,295,662 for the year
ended December 31,1995 (the "1995 Period") included $1,260,933 from the sale of
ALFERON N Injection and the balance from sales of research products. Sales of
ALFERON N Injection to Purdue declined from approximately $918,000 in the 1995
Period to none in the 1996 Period, offset by direct sales of ALFERON N Injection
of approximately $1,810,000 by the Company in the 1996 Period after it
17
reacquired the United States and Canadian marketing rights for ALFERON N
Injection from Purdue in May 1996. There were no sales to Purdue during the 1996
Period because the Company was negotiating the reacquisition of United States
and Canadian marketing rights from Purdue during such Period and Purdue had
adequate inventory from which to make sales pending the consummation of such
reacquisition. Cost of goods sold and excess/idle production costs totaled
$1,399,610 and $3,076,249 for the 1996 Period and 1995 Period, respectively.
Substantially all of the inventory which was sold during the 1996 Period and the
1995 Period had previously been written down to its then net realizable value.
Since the facility was operating during the 1996 Period and 1995 Period,
excess/idle production costs primarily represented current production costs in
excess of the estimated net realizable value of the inventory produced. The
positive gross margin achieved during the 1996 Period reflects the higher
selling prices of ALFERON N Injection realized as a result of the reacquisition
of United States marketing rights, as well as the low carrying values of
inventories written down in prior periods due to the sales prices specified in
the Purdue distribution agreements.
Research and development expenses during the 1996 Period of $6,400,313
increased by $2,674,083 from $3,726,230 for the 1995 Period, principally because
the Company has increased its level of clinical research on ALFERON N Injection.
The Company received $258,984 and $181,992 during the 1996 Period and 1995
Period, respectively, as rental income from G.P. Strategies for the use of a
portion of the Company's facilities, which offset research and development
expenses.
General and administrative expenses for the 1996 Period were $3,404,578
as compared to $1,939,864 for the 1995 Period. The increase of $1,464,714 was
principally due to non-recurring compensation expenses of approximately $768,000
($517,000 of which was paid in shares of Common Stock) and the balance to
increases in payroll and other operating expenses, including distribution
expenses of $160,000 for ALFERON N Injection incurred pursuant to the
distribution agreement with Purdue which was entered into in connection with the
Company's reacquisition of marketing rights. G.P. Strategies provides certain
administrative services for which the Company paid G.P. Strategies $120,000 for
each of the 1996 Period and 1995 Period. In addition, for the 1996 Period and
1995 Period, the Company reimbursed G.P. Strategies $195,000 and $249,996,
respectively, for expenses paid by G.P. Strategies on behalf of the Company.
During the 1995 Period, G.P. Strategies provided to the Company, at its
estimated cost, certain personnel which the Company used in its operations. For
the 1995 Period, payments to G.P. Strategies for the services provided to the
Company by G.P. Strategies personnel amounted to $871,149. Commencing January 1,
1996, most of the G.P. Strategies personnel who had been providing a portion of
their time to the Company became employees of the Company and are now providing
a portion of their time to G.P. Strategies at the Company's estimated cost. For
the 1996 Period, receipts from G.P. Strategies for the services provided to G.P.
Strategies by Company personnel amounted to $351,759 and payments to G.P.
Strategies for the services provided to the Company by G.P. Strategies personnel
amounted to $154,758.
The $3,313,705 cost of reacquisition of marketing rights from Purdue
was charged to expense in the second quarter of 1996.
Interest income for the 1996 Period was $440,755 as compared to
$155,478 for the 1995 Period. The increase of $285,277 was due to more funds
available for investment in the current Period.
Interest expense for the 1996 Period and 1995 Period was zero and
$80,511, respectively. The decrease was due to the absence of interest bearing
debt during the 1996 Period.
As a result of the foregoing, the Company incurred net losses of
$11,985,544 and $7,371,714 for the 1996 Period and 1995 Period, respectively.
Recent Tax and Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" which established standards for computing and presenting earnings per
share (EPS). The Statement simplifies the standards for computing EPS, replaces
the presentation of primary EPS with a presentation of basic EPS and requires
dual presentation of basic and diluted EPS on the face of the income statement.
This Statement was effective for financial statements issued for periods after
December 15, 1997 and required restatement of all prior-period EPS data
presented. The adoption of SFAS No. 128 did not have a material impact on
previously reported EPS data.
The Financial Accounting Standards Board issued Accounting Standards
(SFAS 130), "Reporting Comprehensive Income", in June 1997 which requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company does not believe
that this Statement will have an impact on the 1998 financial statements.
18
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information". SFAS 131 requires
disclosure of certain information about operating segments and about products
and services, geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect that
this new standard will have on disclosures in the Company's financial
statements.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
While the Company is not heavily reliant upon computer processing of
its data, the Company is utilizing internal resources to identify, correct or
reprogram and test its systems for year 2000 compliance. It is anticipated that
the project will be completed by the middle of 1999. Management has not yet
assessed the year 2000 compliance expense and related potential effect on the
Company's earnings, but the Company believes these expenses will not be
material. However, there can be no assurance that the systems of other companies
on which the Company's systems rely also will be timely converted or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems.
Forward-Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, uncertainty of
obtaining additional funding for the Company; uncertainty of obtaining United
States regulatory approvals for the Company's products under development and
foreign regulatory approvals for the Company's FDA-approved product and products
under development and, if such approvals are obtained, uncertainty of the
successful commercial development of such products; substantial competition from
companies with substantially greater resources than the Company in the Company's
present and potential businesses; no guaranteed source of required materials for
the Company's products; dependence on certain distributors to market the
Company's products; potential adverse side effects from the use of the Company's
products; potential patent infringement claims against the Company; possible
inability of the Company to protect its technology; uncertainty of
pharmaceutical pricing; substantial royalty obligations payable by the Company;
limited production experience of the Company; risk of product liability; and
risk of loss of key management personnel, all of which are difficult to predict
and many of which are beyond the control of the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
19
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . .. . . . . 21
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996.. . . . . . . . . 22
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1997, 1996 and 1995. . . . . . . . 24
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 26
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon Sciences,
Inc. and subsidiary as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interferon Sciences,
Inc. and subsidiary at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
New York, New York
April 2, 1998
21
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1997 1996
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 14,059,283 $ 17,491,955
Accounts and other receivables 989,458 233,037
Inventories, net of reserve in 1997
of $7,254,710 3,332,653 4,328,598
Receivables from G.P. Strategies and
affiliated companies 21,904 82,902
Prepaid expenses and other current assets 65,353 162,019
------------- -----------
Total current assets 18,468,651 22,298,511
------------- -----------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,684,269 7,611,994
Equipment 5,671,836 4,720,936
-------------- ------------
13,496,755 12,473,580
Less accumulated depreciation (8,266,892) (7,514,747)
-------------- ------------
5,229,863 4,958,833
-------------- ------------
Patent costs, net of accumulated amortization
of $240,199 and $209,542 280,962 311,619
Other assets 173,900 173,900
------------- ------------
$ 24,153,376 $ 27,742,863
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,552,182 $ 1,908,381
Accrued expenses 387,554 460,651
------------- ------------
Total current liabilities 3,939,736 2,369,032
------------- ------------
Commitments and contingencies
Stockholders' equity*
Preferred stock, par value $.01 per share;
authorized - 5,000,000 shares; none
issued and outstanding
Common stock, par value $.01 per share; authorized
- 55,000,000 shares; issued and outstanding
- 15,210,405 and 12,276,195 shares 152,104 122,762
Capital in excess of par value 123,946,331 107,396,184
Accumulated deficit (103,884,795) (82,145,115)
------------- ------------
Total stockholders' equity 20,213,640 25,373,831
------------- ------------
$ 24,153,376 $ 27,742,863
============= ============
*Stockholders' equity has been restated to reflect the effect of the
one-for-four reverse stock split (see Note 11 to the Consolidated Financial
Statements).
The accompanying notes are an integral part of these consolidated financial
statements.
22
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- -------
Revenues
ALFERON N Injection $ 2,927,585 $ 1,939,595 $ 1,260,933
Research products and other
revenues 28,217 152,312 34,729
------------ ------------ ------------
Total revenues 2,955,802 2,091,907 1,295,662
------------ ------------ ------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 1,857,959 1,399,610 3,076,249
Provision for excess inventory 7,254,710
Research and development
(net of $234,996, $258,984 and $181,992
of rental income received from
G.P. Strategies) 11,863,987 6,400,313 3,726,230
General and administrative (includes
$255,000, $469,758 and $1,241,145
of payments to G.P. Strategies for
management fees and reimbursements
of certain salaries and operating
expenses; net of $351,759 received
from G.P. Strategies in 1996 for
reimbursements of certain salaries) 4,389,025 3,404,578 1,939,864
Cost of reacquisition of
marketing rights 3,313,705
------------ ------------- ------------
Total costs and expenses 25,365,681 14,518,206 8,742,343
------------ ------------- ------------
Loss from operations (22,409,879) (12,426,299) (7,446,681)
Interest income 670,199 440,755 155,478
Interest expense (includes $34,889
in 1995 to G.P. Strategies) (80,511)
------------- ------------- ------------
Net loss $(21,739,680) $(11,985,544) $ (7,371,714)
============= ============= ============
Basic and diluted
loss per share* $ (1.63) $ (1.20) $ (1.11)
============= ============= ============
Weighted average number of
shares outstanding* 13,341,758 10,015,616 6,661,664
============= ============= ============
*All Periods have been restated to reflect the effect of the one-for-four
reverse stock split (see Note 11 to the Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial
statements.
23
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Capital in Total
Common Stock excess of Accumulated Stockholders'
Shares Amount par value deficit equity
------------------ ---------- ------------ -------------
Balance at December 31, 1994 4,877,323* $ 48,773* $ 65,718,563* $(62,787,857) $ 2,979,479
Net proceeds from public sale
of common stock 3,000,000 30,000 12,464,035 12,494,035
Termination of commitment to repurchase
common stock from Purdue Frederick 154,998 1,550 2,478,426 2,479,976
Net proceeds from sale of common stock
to Fujimoto Diagnostics, Inc. 258,621 2,586 1,479,914 1,482,500
Net proceeds from sale of common stock
to Amarillo Bioscience, Inc. and its licensee 93,750 938 741,562 742,500
Issuance of common stock in exchange
for warrants to purchase common stock 225,000 2,250 (2,250)
Proceeds from exercise of common stock options 2,500 25 19,975 20,000
Net loss ( 7,371,714) (7,371,714)
--------------------------------------------------------------------------
Balance at December 31, 1995 8,612,192 86,122 82,900,225 (70,159,571) 12,826,776
Net proceeds from public and private sale of
common stock 3,525,816 35,258 23,480,817 23,516,075
Net proceeds from sale of common stock
to Fujimoto Diagnostics, Inc. 71,806 718 499,282 500,000
Common stock issued as compensation 66,381 664 515,860 516,524
Net loss (11,985,544) (11,985,544)
--------------------------------------------------------------------------
Balance at December 31, 1996 12,276,195 122,762 107,396,184 (82,145,115) 25,373,831
Net proceeds from sale of common stock 2,912,092 29,121 16,406,599 16,435,720
Purchase of fractional shares of common stock
resulting from reverse stock split (106) (1) (632) (633)
Common stock issued under Company 401(k) plan 2,415 24 22,943 22,967
Proceeds from exercise of common stock options 19,809 198 121,237 121,435
Net loss (21,739,680) (21,739,680)
--------------------------------------------------------------------------
Balance at December 31, 1997 15,210,405 $ 152,104 $ 123,946,331 $(103,884,795) $ 20,213,640
- ---------------
*All Periods have been restated to reflect the effect of the one-for-four
reverse stock split (see Note 11 to the Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial
statements
24
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- --------
Cash flows from operations:
Net loss $(21,739,680) $(11,985,544) $(7,371,714)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 782,802 785,185 777,276
Compensation and benefits
paid with common stock 22,967 516,524
Provision for excess inventory 7,254,710
Reduction of other assets 150,000
Change in operating assets
and liabilities:
Receivables from G.P. Strategies and
affiliated companies 60,998 (55,691) (7,210)
Inventories (6,258,765) (3,512,620) 213,180
Consignment inventory 220,410
Accounts and other receivables (756,421) (185,686) (561,805)
Prepaid expenses and other current assets 96,666 (86,019) (20,779)
Accounts payable and accrued expenses 1,570,704 1,243,226 (503,219)
--------------- ------------ -------------
Net cash used for operations (18,966,019) (13,280,625) (7,103,861)
--------------- ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment ( 1,023,175) (579,404) (68,107)
Reductions (additions) to intangible and
other assets 114,801 (132,954)
--------------- ------------ -------------
Net cash used for investing activities (1,023,175) (464,603) (201,061)
--------------- ------------ -------------
Cash flows from financing activities:
Net proceeds from sale of common stock 16,435,720 24,016,075 14,719,035
Decrease in advances from G.P. Strategies (134,347)
Reduction of long-term debt (409,275)
Loans from principal stockholders 1,870,000
Repayment of loans from principal stockholders (1,870,000)
Proceeds from exercise of common stock options 121,435 20,000
Purchase of fractional shares of common stock (633)
--------------- ------------ -------------
Net cash provided by financing activities 16,556,522 24,016,075 14,195,413
--------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents (3,432,672) 10,270,847 6,890,491
Cash and cash equivalents at beginning of year 17,491,955 7,221,108 330,617
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 14,059,283 $17,491,955 $ 7,221,108
============== ============ =============
Cash paid for interest expense $ $ $ 79,166
============== ============ =============
The accompanying notes are an integral part of these consolidated financial
statements
25
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization, Business and Transactions with G.P. Strategies Corporation
Interferon Sciences, Inc. (the "Company")is a biopharmaceutical company
engaged in the study, manufacture, and sale of pharmaceutical products based on
its highly purified, multispecies, natural source alpha interferon ("Natural
Alpha interferon"). The Company's ALFERON(R) N Injection (Interferon Alfa-n3)
product has been approved by the United States Food and Drug Administration
("FDA") for the treatment of certain types of genital warts and is being studied
for potential use in the treatment of HIV, hepatitis C, and other indications.
The Company also is studying ALFERON N Gel and ALFERON LDO(R), the Company's
topical and oral formulations of Natural Alpha interferon, for the potential
treatment of viral and immune system diseases. (See Note 6).
The Company is a party to a management agreement with G.P. Strategies
Corporation("G.P. Strategies"), formerly National Patent Development
Corporation, pursuant to which certain legal, financial and administrative
services have been provided by employees of G.P. Strategies. The fee for such
services in 1997, 1996 and 1995 was $120,000 annually. In addition, during such
years G.P. Strategies provided to the Company, at its estimated cost, certain
personnel and services which the Company used in its operations. For the years
ended December 31, 1997, 1996 and 1995, such charges amounted to $135,000,
$349,758, and $1,121,145, respectively. During the year ended December 31, 1996,
the Company provided certain services to G.P. Strategies at the Company's
estimated cost of $351,759.
The Company owns the buildings which contain its offices and
laboratories and until March 1998 leased out a portion of the buildings to G.P.
Strategies. Total occupancy costs for the years ended December 31, 1997, 1996
and 1995 were approximately $1,039,000, $991,000 and $729,000, respectively.
G.P. Strategies paid to the Company as rent G.P. Strategies's proportionate
share of such occupancy costs (based on both square feet occupied and number of
personnel), which amounted to $234,996, $258,984 and $181,992, respectively.
See Note 15 for information with respect to royalty obligations to G.P.
Strategies.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The financial statements include the
operations of the Company and Interferon Sciences Development Corporation
("ISD"), its wholly owned subsidiary.
Statements of cash flows -- For purposes of the statements of cash
flows, the Company considers all highly liquid instruments with maturities of
three months or less from purchase date to be cash equivalents.
Property, plant and equipment -- Property, plant and equipment
are carried at cost. Major additions and betterments are capitalized while
maintenance and repairs which do not extend the lives of the assets are expensed
currently.
Depreciation -- The Company provides for depreciation and amortization
of plant and equipment following the straight-line method over the estimated
useful lives of such assets as follows:
Estimated
Class of Assets Useful Lives
--------------- ------------
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Intangible assets -- The Company capitalizes costs to obtain and
maintain patents and licenses. Patent costs are amortized over 17 years and
license costs are amortized over 5 years, each on a straight-line basis. To the
extent a patent is determined to be worthless, the related capitalized cost is
immediately expensed.
Revenue recognition -- Sales are recorded upon shipment of product.
26
Collaborative agreement research and development revenues and costs --
The costs of performing research and development are reported when incurred.
Generally, the Company matches its collaborative research and development
revenues in the same accounting periods in which the related research costs are
incurred. However, when the revenues are exhausted, the Company has the option
to continue the research activities at its own expense.
Inventories -- Inventories, consisting of raw materials, work in
process and finished goods, are stated at the lower of cost or market on a FIFO
basis. Inventories, if any, which are expected to become obsolete before sale or
use in research are written off.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Stock option plan -- Prior to January 1, 1996, the Company accounted
for its stock option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Reverse stock split -- As a result of a one-for-four reverse stock
split effective as of 5:00 PM, New York City time on March 21, 1997, all shares
and per share information have been restated.
Loss per share - The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", which established
standards for computing and presenting earnings per share (EPS). The statement
simplifies the standards for computing EPS, replaces the presentation of primary
EPS with a presentation of basic EPS and requires a dual presentation of basic
and diluted EPS on the face of the income statement. Basic EPS are based upon
the weighted average number of common shares outstanding during the period.
Diluted EPS are based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding. At December 31, 1997, 1996 and
1995, the Company's options and warrants are anti-dilutive and therefore
basic and diluted EPS are the same.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1997, the Company had an accumulated
deficit of approximately $103.9 million. For the years ended December 31, 1997,
1996 and 1995, the Company had losses from operations of approximately $22.4
million (including a provision for excess inventory of $7.3 million), $12.4
million and $7.4 million, respectively. Although the Company received FDA
approval in October 1989 to market ALFERON N Injection in the United States
for the treatment of certain genital warts and ALFERON N Injection currently
is marketed and sold in the United States by the Company, in Mexico by
Industria Farmaceutica Andromaco, S.A. De C.V. and in Germany by Cell Pharm GmbH
("Cell Pharm"), the Company has had limited revenues from the sale of ALFERON N
Injection to date. For the Company to operate profitably, the Company must sell
significantly more ALFERON N Injection. Increased sales will depend primarily
upon the expansion of existing markets and/or successful attainment of FDA
approval to market ALFERON N Injection for additional indications, of which
there can be no assurance. There can be no assurance that sufficient quantities
of ALFERON N Injection will be sold to allow the Company to operate profitably.
27
The Company has limited financial resources as of December 31, 1997
with which to support future operating activities and to satisfy its financial
obligations as they become payable. Consequently, management is continuing to
actively pursue raising additional capital by either (i) issuing securities in a
public or private equity offering, (ii) licensing the rights to its injectable,
topical or oral formulations of alpha interferon, or (iii) entering into
collaborative or other arrangements with corporate partners. Insufficient funds
will require the Company to further delay, scale back, or eliminate certain or
all of its activities or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. In
addition, the Company hopes to renegotiate the minimum purchase commitment
disclosed in Note 15, but if it is unable to do so such obligation may have a
material adverse effect on the financial condition of the Company.
Based on the Company's estimates of revenues, expenses and levels of
production, management believes that the cash available will be sufficient to
enable the Company to continue operations through approximately September 1998.
However, actual results, especially with respect to revenues, may differ
materially from such estimates, and no assurance can be given that additional
funding will not be required sooner than anticipated or that such additional
funding, whether from financial markets or collaborative or other arrangements
with corporate partners or from other sources, will be available when needed or
on terms acceptable to the Company.
Note 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. As of March 31, 1995, the Company obtained a
non-exclusive perpetual license from Hoffmann (the "Hoffmann Agreement") which
grants the Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann, any formulation of Natural
Alpha Interferon. The Hoffmann Agreement replaced a 1988 non-exclusive license
which, as amended, granted the Company the right to make, use, and sell in the
United States, without a potential patent infringement claim from Hoffmann,
injectable formulations of Natural Alpha Interferon for the treatment of genital
warts or patients with diseases refractory to recombinant interferon therapy.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. The Hoffmann Agreement can be terminated by the Company on 30 days'
notice with respect to the United States patent, any individual foreign patent,
or all patents owned by Hoffmann. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. When the Company received FDA
approval for ALFERON N Injection for the treatment of genital warts in 1989, the
Company became obligated to issue shares of its Common Stock to Hoffmann as a
prepaid royalty against future net sales by the Company. Under the terms of the
Hoffmann Agreement, certain payments previously made to Hoffmann (including a
portion of the value of the Common Stock previously issued to Hoffmann) are
available as offsets against 50% of the Company's future royalty obligations to
Hoffmann until the Company obtains an FDA approval to market ALFERON N Injection
for an additional indication. As of December 31, 1997, based upon the
market value of the Company's common stock, the Company had approximately
$698,200 of credits available to offset its future royalty obligations to
Hoffmann, which for financial statement purposes, were expensed in previous
periods.
For the years ended December 31, 1997, 1996 and 1995, the Company
applied $117,102, $77,584 and $50,437 respectively, of the prepayments
previously made to Hoffmann against the amounts due.
Note 5. Agreements with Purdue
In 1988, the Company entered into exclusive marketing and distribution
agreements with affiliates of The Purdue Frederick Company (collectively,
"Purdue") with respect to ALFERON N Injection. The Company reacquired from
Purdue in 1993 and 1994 all marketing rights except in the United States and
Canada. In May 1996, the Company reacquired the United States and Canadian
marketing rights from Purdue for $3,313,705, which was charged to expense in the
second quarter of 1996.
28
In connection with the reacquisition of United States and Canadian
marketing rights (i) Purdue agreed to provide during the first year after the
reacquisition certain distribution services to the Company with respect to
24,000 vials of ALFERON N Injection at an aggregate cost of $240,000, (ii)
Purdue agreed to provide during the second year after the reacquisition, if
requested by the Company, certain distribution services to the Company with
respect to up to 30,000 vials of ALFERON N Injection at a cost of $15 per vial,
and (iii) the Company purchased from Purdue all vials of ALFERON N Injection and
all other assets of Purdue used exclusively in its ALFERON N Injection business
at an aggregate cost of $206,307.
Note 6. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
During January 1984, the Company organized ISD to act as the sole
general partner of Interferon Sciences Research Partners, Ltd., a New Jersey
limited partnership (the "Partnership"). The Company and the Partnership entered
into a development contract whereby the Company received substantially all of
the net proceeds ($4,414,475)of the Partnership's public offering of limited
partnership interests. The Company used the proceeds to perform research,
development and clinical testing on behalf of the Partnership for the
development of ALFERON Gel containing recombinant interferon.
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. During May 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. At a meeting with
the FDA in February, 1990, the FDA indicated that additional process development
and clinical trials would be necessary prior to approval of ALFERON Gel. The
Company believed, at that time, that the costs to complete the required process
development and clinical trials would be substantial, and there could be no
assurance that the clinical trials would be successful.
As a result of the above events, in March 1992, the Company withdrew
its FDA Product License Application for ALFERON Gel containing recombinant
interferon. In place of single species recombinant interferon, previously
ALFERON Gel's active ingredient, the Company commenced, in 1992, further
development of ALFERON Gel using the Company's natural source multi-species
alpha interferon ("ALFERON N Gel"). Assuming successful development and
commercial exploitation of ALFERON N Gel, the Company may be obligated to pay
the Partnership royalties equal to 4% of the Company's net sales of ALFERON N
Gel and 15% of revenues received from sublicensing ALFERON N Gel.
Note 7. Agreement with Fujimoto Diagnostics, Inc.
In the first quarter of 1995, the Company entered into an agreement with
Fujimoto Diagnostics, Inc. ("Fujimoto"), a pharmaceutical company located in
Osaka, Japan, for the commercialization of the Company's ALFERON N Injection and
ALFERON N Gel in Japan. In connection with the agreement, Fujimoto purchased
$1,500,000 of Common Stock at $5.80 per share (the then market price), all of
which cash was received during the first quarter of 1995, and agreed to purchase
an additional $500,000 of Common Stock on February 6, 1996 at the then market
price. During January 1996, Fujimoto advised the Company that, to date, it had
incurred higher than anticipated development expenses, and that it had
determined that there may be greater difficulties in obtaining Japanese
regulatory approval than originally anticipated. Fujimoto therefore requested
that the Company renegotiate such investment agreement, and the Company met with
Fujimoto to consider its request. As a result of such meeting, during the third
quarter of 1996 Fujimoto purchased the additional $500,000 of Common Stock
originally scheduled for purchase on February 6, 1996 and reimbursed the Company
$133,000 for the cancellation of a prior commitment to purchase ALFERON N
Injection. The $133,000 was recorded as other revenues in the third quarter of
1996. In March, 1997, Fujimoto and the Company terminated the Fujimoto
Agreement.
Note 8. Agreement with Cell Pharm GmbH
In 1996, the Company entered into a supply and distribution agreement
(the "Cell Pharm Agreement") with Cell Pharm. Cell Pharm, headquartered in
Hanover, Germany, is a privately-owned pharmaceutical company primarily involved
in the distribution and manufacture of products for cancer treatment and other
uses. The Cell Pharm Agreement, which terminates on June 30, 2001, unless
renewed, grants Cell Pharm rights to distribute, promote, and sell ALFERON N
Injection in Germany. The Cell Pharm Agreement provides that the Company will
supply Cell Pharm with ALFERON N Injection at specified prices, and obligates
29
Cell Pharm to purchase specified minimum amounts in each annual period. In
addition, Cell Pharm is required to pay the Company 50% of the incremental
revenue Cell Pharm receives as a result of selling ALFERON N Injection at a
price higher than a specified price. Cell Pharm is required to maintain an
active and efficient sales and customer service organization with adequately
trained personnel for marketing and selling ALFERON N Injection. Cell Pharm
represents to the Company that it has obtained, and Cell Pharm agrees to
maintain in effect, all registrations, approvals, and consents from governments
in Germany as are necessary to permit or facilitate the lawful handling,
promotion, and resale of ALFERON N Injection in Germany. Cell Pharm has informed
the Company that it intends to market ALFERON N Injection under the trade name
Cytoferon(R), pursuant to Cell Pharm's existing regulatory approval to market
Cellferon in Germany for the treatment of hairy cell leukemia and for the
treatment of patients who develop antibodies against recombinant alpha
interferons.
Note 9. Inventories
Inventories, consisting of material, labor and overhead, are classified
as follows:
December 31,
1997 1996
Finished goods................... $ 3,720,000 $ 2,563,755
Work in process................. 5,621,714 1,106,214
Raw materials....................... 1,245,649 658,629
Less reserve for excess inventory (7,254,710)
------------ ---------------
$ 3,332,653 $ 4,328,598
============ ===============
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by Quality Assurance.
In light of the results to date of the Company's Phase 3 studies of
ALFERON N Injection in HIV- and HCV-infected patients, the Company has written-
down the carrying value of its inventory of ALFERON N Injection to its
estimated net realizable value. The write-down is a result of the Company's
reassessment of anticipated near-term needs for product to be sold or utilized
in clinical trials (within approximately a two-year period based on historical
sales levels). As a result, inventories at December 31, 1997 reflect a reserve
for excess inventory of $7,254,710. Also, during the quarter ending March 31,
1998, the Company will record an additional write-off of approximately
$3,000,000 of inventories that were produced during the three months ended
March 31, 1998.
Write-downs of inventories at December 31, 1995 to their estimated
net realizable values are included in cost of goods sold and excess/idle
production costs for 1995.
Note 10. Income Taxes
On May 30, 1991, G.P. Strategies exchanged the Company's Class B Common
Stock for an equal number of shares of the Company's Common Stock. As a result,
on that date the Company ceased to be included in G.P. Strategies's consolidated
Federal income tax return. For Periods subsequent to May 30, 1991, the Company
files its own consolidated Federal income tax return, including its wholly-owned
subsidiary.
As a result of the loss allocation rules contained in the Federal
income tax consolidated return regulations, approximately $6,009,000 of net
operating loss carry-forwards, which expire in 2001-2006, are available to the
Company upon ceasing to be a member of G.P. Strategies's consolidated return
group. In addition, the Company has net operating loss carry-forwards from tax
years prior to joining the G.P. Strategies consolidated return group of
$742,000, which expire December 31, 1998. Further, the Company has net operating
loss carry-forwards for periods subsequent to May 31, 1991, and through December
31, 1996 of approximately $47,984,000, which expire in 2006-2011. For the year
ended December 31, 1997, the Company had a tax net operating loss of
$14,317,000, which expires in 2012. At December 31, 1997, the Company has total
net operating loss carry-forwards of approximately $69,052,000. The loss
carry-forwards expire at various dates from 1998 through 2012, as reflected
above.
30
The Company believes that the events culminating with the closing of
its Common Stock Offering on August 22, 1995 resulted in an "ownership change"
under Internal Revenue Code, Section 382, with respect to its stock. The Company
believes that as a result of the ownership change, the future utility of its
pre-change net operating losses are limited to an annual amount of approximately
$3,230,000. In addition, the Company has approximately $90,000 of investment tax
credit carry-forwards, which expire in 1998-2000 and $692,000 of research and
development credit carry-forwards, which expire in 1998-2002 that are, in
accordance with Internal Revenue Code, Section 383, subject to the annual
limitation under Internal Revenue Code Section 382. The Company further believes
that the events culminating with the closing of its private placement of common
stock on August 18, 1997, may give rise to an "ownership change" under Internal
Revenue Code, Section 382, with respect to its stock.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate.
The Company has, as of December 31, 1997, deferred tax assets of
approximately $26,723,000, deferred tax liabilities of approximately $68,000 and
a valuation allowance of approximately $26,655,000. At January 1, 1997, the
valuation allowance was $20,051,000. The increase to the valuation allowance of
$6,604,000 is due primarily to net operating losses. The tax effects that give
rise to these deferred tax assets and liabilities consist of the following as of
December 31, 1997 and 1996:
Deferred tax assets 1997 1996
- ------------------- ---- ----
Net operating loss carry-forwards $ 23,474,000 $ 19,084,000
Tax credit carry-forwards 782,000 1,089,000
Inventory 2,467,000
----------- -----------
26,723,000 20,173,000
Deferred tax liabilities
Property and equipment,
principally due to
differences in depreciation (68,000) (122,000)
------------ ------------
Net deferred tax asset 26,655,000 20,051,000
Valuation allowance (26,655,000) (20,051,000)
------------ ------------
Net deferred tax asset after
valuation allowance $ --- $ ---
============ ============
Note 11. Common Stock, Stock Options, Warrants and Other Shares Reserved
On March 21, 1997, the Company's stockholders approved a proposal to
amend the Company's Restated Certificate of Incorporation to effect a
one-for-four reverse stock split of the Company's Common Stock. The reverse
stock split became effective as of 5:00 PM, New York City time, on March 21,
1997 (the "Effective Time"). As of March 21, 1997, there were 49,104,779 shares
of Common Stock outstanding and after the Effective Time there were 12,276,089
shares of new Common Stock outstanding.
The par value of the Common Stock did not change as a result of the
reverse stock split. Cash was paid in lieu of fractional shares based on the
last reported sale price of the new Common Stock on the first trading date after
the Effective Time.
The balance sheet at December 31, 1996 as well as the loss per share
and average outstanding shares for the years ended December 31, 1996 and 1995,
have been restated to reflect the reverse split as if it had occurred on January
1, 1995.
In 1981, the Company adopted the 1981 Stock Option Plan (the "Plan"),
authorizing a committee of the Board of Directors to grant options, over a
10-year Period, to purchase not more than 125,000 shares of Common Stock to
officers, directors, employees and consultants of the Company. Since 1981, the
Plan has been amended several times to increase the number of shares issuable
under the Plan and to extend the Plan until 2001. Pursuant to the terms of
the Plan, no option may be exercised after 10 years from the date of grant.
The exercise price for any option issued may not be less than 85 percent of the
market price of the common stock on the date of issuance.
31
At December 31, 1997, the per share weighted-average fair value of
stock options granted during 1997, 1996 and 1995 was $ 4.41, $3.44 and $5.16 on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield of 0.0%,
risk-free interest rate of 6.3%, expected volatility of 85.5% and an expected
life of 4.4 years; 1996 - expected dividend yield of 0.0%, risk-free interest
rate of 5.8%, expected volatility of 77.2% and an expected life of 3.3 years;
1995 - expected dividend yield of 0.0%, risk-free interest rate of 5.9%,
expected volatility of 77.2% and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below:
1997 1996 1995
---- ---- ----
Net loss as reported $(21,739,680) $(11,985,544) $ (7,371,714)
pro forma (24,255,223) (13,251,799) (7,519,328)
Basic and diluted
loss per share as reported $ (1.63) $ (1.20) $ (1.11)
pro forma (1.82) (1.32) (1.13)
Pro forma net loss reflects only options granted in 1997, 1996 and
1995. In addition, compensation cost is reflected over the options vesting
Period. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above.
Employee stock option activity for options under the Plan during the
periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- -----------
Balance at December 31, 1994 718,588 $8.23
Granted 142,500 7.76
Exercised (2,500) 8.00
Forfeited (54,500) 8.08
Expired (42,750) 9.00
--------
Balance at December 31, 1995 761,338 8.11
Granted 364,325 6.08
Exercised --- ---
Forfeited (1,275) 7.90
Expired (324,325) 8.10
--------
Balance at December 31, 1996 800,063 7.19
Granted 588,666 6.65
Exercised (14,543) 5.88
Forfeited (24,708) 6.12
Expired (287,641) 8.27
----------
Balance as December 31, 1997 1,061,837 $6.64
----------
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $4.36 - $11.00 and 3.02
years, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable
was 768,791, 677,113 and 615,738, respectively, and the weighted-average
exercise price of those options was $7.04, $7.12 and $8.17, respectively.
32
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended
December 31, 1997, 1996 and 1995, options and warrants exercisable and shares
reserved for issuance at December 31, 1997, 1996 and 1995 are as follows:
Price Range Number of
Per Share Shares
----------- ---------
Outstanding at December 31, 1994 $ 8.00 - $ 26.00 2,070,088
Granted 6.24 - 16.80 480,068
Exercised 8.00 - (2,500)
Terminated 8.00 - 26.00 (1,227,250)
--------------------- -----------
Outstanding at December 31, 1995 6.24 - 16.80 1,320,406
Granted 4.36 - 9.60 564,325
Exercised --
Terminated 7.24 - 9.00 (408,471)
--------------------- -----------
Outstanding at December 31, 1996 4.36 - 16.80 1,476,260
Granted 5.00 - 9.18 863,095
Exercised 4.36 - 8.00 (19,809)
Terminated 5.00 - 9.40 (343,599)
--------------------- -----------
Outstanding at December 31, 1997 4.36 - 15.58 1,975,947
Exercisable
December 31, 1995 6.24 - 16.80 893,973
=========
December 31, 1996 4.36 - 16.80 1,153,310
=========
December 31, 1997 4.36 - 15.58 1,548,082
=========
Shares reserved for issuance
December 31, 1995 1,347,899
=========
December 31, 1996 1,465,028
=========
December 31, 1997 2,129,396
=========
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1994, include 5,000 shares under a warrant
agreement with U.S. Capital Corporation. Such warrants expired unexercised in
1995.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1995, include 82,871 shares, under warrant
agreements with the underwriter of the October 1991 public offering of Common
Stock. Such warrants expired unexercised in 1996.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1996 and 1995, include 31,250 shares under a
warrant agreement with Strategic Growth International, the Company's former
outside public relations advisor. Such warrants expired unexercised in 1997.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1997, include 166,409 shares and at December 31,
1996 and 1995, include 148,865 shares and at December 31, 1994, include
1,250,000 shares under a warrant agreement with certain parties. During 1995,
these parties agreed to exchange 562,500 Class A Warrants and 562,500 Class B
Warrants for 225,000 shares of Common Stock.
Options and Warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1997, 1996 and 1995, include 15,250 shares under a
warrant agreement issued as a commission in connection with the sale of shares
of Common Stock to an institutional investor.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1997, include 275,567 shares and at December 31,
1996 and 1995, include 280,833 shares under warrant agreements with the
underwriter of the August/September 1995 Offering.
33
Options and warrants outstanding and shares reserved for issuance at
December 31, 1997, and options and warrants exercisable at December 31, 1997 and
1996, include 322,065 shares and 200,000 shares, respectively, under warrant
agreements with the underwriter of the May and December 1996 Offerings.
Options and warrants outstanding and shares reserved for issuance at
December 31, 1997, include 134,820 shares under warrant agreements with the
underwriters of the 1997 Offerings.
Shares reserved for issuance at December 31, 1997 include 153,449
shares under the common stock compensation plan. (See Note 13).
Note 12. Pension and Investment Plans
Effective March 1, 1992, G.P. Strategies adopted the 1992 401(k)
Savings Plan (the "Savings Plan"). Effective December 31, 1991, the Plan
participants became eligible to participate in G.P. Strategies's Savings Plan.
G.P. Strategies's Savings Plan is for employees who have completed one year
of service.
The Savings Plan permits pre-tax contributions to the Savings Plan by
participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 6%
of base compensation. The Company matches 40% of the participants' eligible
contributions based on a formula set forth in the Savings Plan. On October 1,
1997, the Savings Plan was transferred into a new Savings Plan (the "New Savings
Plan"). Under the New Savings Plan, participants may contribute up to 15% of
base compensation and the Company will match up to the 6% level of the
participants eligible contributions. The New Savings Plan increased the Company
match to 100% of the participant's eligible contributions by matching 40% in
cash and 60% in the Company's common stock. For 1997, 1996 and 1995, the
Company's contribution to the Savings Plan was $126,000, $79,000 and $49,000,
respectively. Participants are fully vested in their contributions and may
withdraw such contributions at time of employment termination, or at age 59 1/2,
or earlier in the event of financial hardship. Amounts otherwise are paid at
retirement or in the event of death or disability. Employer contributions vest
at a rate of 20% per year.
The New Savings Plan is administered by a trustee appointed by the Board
of Directors of the Company and all contributions are held by the trustee and
invested at the participants' direction in various mutual funds.
The Company does not provide any post-retirement benefits, other than
pensions, to its employees.
Note 13. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees
will receive, as additional compensation, a pre-determined amount of the
Company's common stock in three equal installments on October 1, 1998, 1999, and
2000, provided that the key employee remain in the employ of the Company at each
such installment date. The total number of shares reserved for issuance under
the Stock Compensation Plan is 153,449 and the total number of key employees
participating in this plan is 21.
Profit Sharing Plan
Effective June 6, 1988, the Company adopted the 1988 Profit Sharing Plan
(the "Profit Sharing Plan") providing key employees and consultants with an
opportunity to share in the profits of the Company. The Profit Sharing Plan is
administered by the Company's Compensation Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan. A
number of key employees are eligible to participate in the Profit Sharing Plan.
The Compensation Committee may require as a condition to participation
that a participant remain in the employ of the Company until the end of the
fiscal year for which payment is to be made. Payments required to be made under
the Profit Sharing Plan must be made within 10 days of the filing of the
Company's tax return. To date, there have been no contributions by the Company
under the Profit Sharing Plan.
34
Note 14. Non-cash Financing and Investing Activities
During the years ended December 31, 1997, 1996 and 1995 the following
non-cash financing and investing activities occurred:
1997:
The Company issued 2,415 shares valued at $22,967 of Common Stock as
part of the Company 401(K) Plan.
The Company issued 215,710 shares of Common Stock for services provided
by the underwriter of the 1997 stock offerings.
1996:
The Company issued 66,381 shares, valued at $516,524, of Common Stock
as compensation.
The Company issued 122,066 shares of Common Stock for services provided
by the underwriter of the December 24, 1996 private placement.
1995:
Offset of receivables in settlement of obligation to repurchase Common
Stock for $550,000 and forgiveness of balance due.
By agreement, the Company terminated a commitment to repurchase 154,998
shares, valued at $2,479,976, of Common Stock from Purdue.
Note 15. Commitments and Contingencies
The Company currently obtains human white blood cells used in the
manufacture of ALFERON N Injection from several sources, including the American
Red Cross pursuant to a supply agreement dated April 1, 1997. The Company will
not need more human white blood cells until such time as production of ALFERON
N INJECTION is resumed. Under the terms of the agreement with the American Red
Cross, the Company is obligated to purchase a minimum of 18,000 buffy coats of
human white blood cells each month through March 1999, at a price per buffy
coat of $14.50. The Company hopes to renegotiate the minimum purchase
commitment, but if it is unable to do so such obligation may have a material
adverse effect on the financial condition of the Company.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by G.P. Strategies, the
Company agreed to pay G.P. Strategies royalties of $1,000,000, but such payments
will be made only with respect to those years in which the Company has income
before income taxes, and will be limited to 25% of such income.
See Notes 4 and 6 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.
In October 1989, the Company entered into a license agreement with a
non-affiliated party for co-exclusive rights to certain low dose oral
formulations of interferon. The Company will be required to pay a royalty of 10%
of net sales, as defined, of products produced and marketed by the Company that
may be developed under the license agreement.
Note 16. Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, approximate fair market
values, because of short maturities or interest rates that approximate current
rates.
Note 17. Subsequent Events
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends).
35
In April 1998, the FDA advised the Company that, although ALFERON N
Injection demonstrated biological activity in the Phase 3 clinical trial in HIV-
infected patients, the results were insufficient for filing for approval for
this additional indication for ALFERON N Injection. In light of the results to
date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-
infected patients, the Company has written-down the carrying value of its
inventory of ALFERON N Injection to its estimated net realizable value. The
write-down is a result of the Company's reassessment of anticipated near-term
needs for product to be sold or utilized in clinical trials(within approximately
a two-year period based on historical sales levels). As a result, inventories
at December 31, 1997 reflect a reserve for excess inventory of $7,254,710. Also,
during the quarter ending March 31, 1998, the Company will record an additional
write-off of approximately $3,000,000 of inventories that were produced during
the three months ended March 31, 1998.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None
36
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
Information with respect to compensation of executives of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which statement will be
filed not later than 120 days after the end of the fiscal year covered by this
Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
----
Independent Auditor's Report ..................................... 22
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996 ...... 23
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996, and 1995 ............................. 24
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1997, 1996 and 1995 ......... 25
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996, and 1995 ............................. 26
Notes to Consolidated Financial Statements .................... 27
(a)(2) Schedules have been omitted because they are not required or are not
applicable, or the required information has been included in the financial
statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no reports on Form 8-K filed by the Registrant during the last
quarter of the Period covered by this report.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERFERON SCIENCES, INC.
By: /s/ Lawrence M. Gordon
----------------------
Lawrence M. Gordon
Chief Executive Officer
Dated: April 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Samuel H. Ronel Chairman of the Board April 15, 1998
- -------------------
Samuel H. Ronel, Ph.D.
/s/ Lawrence M. Gordon Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer) April 15, 1998
Lawrence M. Gordon
/s/ Stanley G. Schutzbank President and Director April 15, 1998
- -------------------------
Stanley G Schutzbank, Ph.D.
___________________ Director April 15, 1998
Leon Botstein, Ph.D.
/s/ Jerome I. Feldman Director April 15, 1998
- ---------------------
Jerome I. Feldman
_____________________ Director April 15, 1998
Sheldon L. Glashow
/s/ Scott N. Greenberg Director April 15, 1998
- ----------------------
Scott N. Greenberg
____________________ Director April 15, 1998
Roald Hoffmann, Ph.D.
/s/ Martin M. Pollak Director April 15, 1998
- --------------------
Martin M. Pollak
/s/ Donald W. Anderson Controller (Principal April 15, 1998
- ---------------------- Accounting and Financial
Donald W. Anderson Officer)
The foregoing constitute a majority of the members of the Board of
Directors.
39
INDEX TO EXHIBITS
Exhibit Number
3.1 - Restated Certificate of Incorporation of the Registrant. Incorporated
herein by reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1988.
3.2 - Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-40902.
3.3 - Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration
Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant. Incorporated herein by reference to Exhibit 3.4 of
Registration Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference
to Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with
the August/September 1995 Offering. Incorporated herein by reference to
Exhibit 4.1 of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with the
May 1996 Offering. Incorporated herein by reference to Exhibit 4.4 of
Registration Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December 1996
Private Placement.
10.1 - Transfer and License Agreement among National Patent, Hydron
Laboratories, Inc. and the Registrant dated as of January 1, 1981. Incorporated
herein by reference to Exhibit 10.8 of the Registrant's Registration Statement
No. 2-71117.
10.2 - Management Services Agreement dated January 1, 1981 between the
Registrant and National Patent. Incorporated herein by reference to Exhibit
10.9 of the Registration Statement No. 2-71117.
10.3 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by
reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.4 - Cross License Agreement dated October 26, 1984 between the Registrant and
the Partnership. Incorporated herein by reference to Exhibit 10V of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1984.
10.5 - Supply Agreement dated September 25, 1992 between the Registrant and
Celltech Limited. Incorporated herein by reference to Exhibit 10.27 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
10.6 - Profit Sharing Plan of the Registrant. Incorporated herein by reference
to Exhibit 10X of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.
10.7 - License Agreement dated October 20, 1989 between the Registrant and
Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to
Exhibit 10Y of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989.
10.8 - Distribution Agreement dated June 14, 1991 between Purdue Pharma L.P.
and the Registrant. Incorporated herein by reference to Exhibit 10.26 of
Registration Statement No. 33-40902.
10.9 - Amended and Restated Distribution Agreement dated June 14, 1991 between
Mundipharma Pharmaceutical Corporation and the Registrant. Incorporated herein
by reference to Exhibit 10.27 of Registration Statement No. 33-40902.
10.10 - G.P. Strategies 401(k) Savings Plan dated January 9, 1992, effective
March 1, 1992. Incorporated herein by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the Year ended December 31, 1992.
10.11 - Amendment dated January 26, 1994 to the Distribution Agreement dated
June 14, 1991 between the Registrant and Purdue Pharma L.P. Incorporated herein
by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for
the Year ended December 31, 1993.
40
10.12 - Amendment dated January 26, 1994 to the Amended and Restated
Distribution Agreement dated June 14, 1991 between the Registrant and
Mundipharma Pharmaceutical Company. Incorporated herein by reference to Exhibit
10.19 to the Registrant's Annual Report on Form 10-K for the Year ended December
31, 1993.
10.13 - Amended and Restated RS Agreement dated January 26, 1994 among the
Registrant, Mundipharma Pharmaceutical Company and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the Year ended December 31, 1993.
10.14 - Agreement dated January 26, 1994 between the Registrant and The Purdue
Frederick Company. Incorporated herein by reference to exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993.
10.15 - Agreement dated January 26, 1994 among the Registrant, Banela
Corporation and Runham Corporation. Incorporated herein by reference to Exhibit
10.22 to the Registrant's Annual Report on Form 10-K for the Year ended December
31, 1993.
10.16 - Purchase Agreement dated as of May 28, 1993 between the Registrant
and David Blech. Incorporated herein by reference to Exhibit 10.26 to
Registration Statement No. 33-78952.
10.17 - Form of Warrant to be issued pursuant to the Purchase Agreement.
Incorporated herein by reference to Exhibit 10.28 to Registration Statement No.
33-78952.
10.18 - Distribution Agreement dated as of February 3, 1994 between Registrant
and Industria Farmaceutica Andromaco, S.A. Incorporated herein by reference to
Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994.
10.19 - Processing and Supply Agreement dated as of September 1, 1994 between
Registrant and Sanofi Winthrop L.P. Incorporated herein by reference to Exhibit
6(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
10.20 - Amendment dated March 24, 1995 to Distribution Agreement dated as of
February 3, 1994 between Registrant and Industria Farmaceutica Andromaco S.A.
Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.21- Purchase and Exchange Agreement dated as of December 6, 1994 between the
Registrant, David Blech and certain designated purchasers. Incorporated herein
by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.22 - Purchase and Exchange Agreement dated as of January 31, 1995 between the
Registrant and Neoprobe Corp. Incorporated herein by reference to Exhibit 10.32
to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.23 - Stock Purchase Agreement dated as of January 24, 1995 between the
Registrant and Fujimoto Diagnostics Inc. Incorporated herein by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.24 - Agreement dated as of January 24, 1995, between the Registrant and
Fujimoto Diagnostics, Inc. Incorporated herein by reference to Exhibit 10.34 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.25 - Form of Stock Purchase Agreement dated as of August 31, 1994 between the
Registrant and Dimensional Funds Advisors, Inc. Incorporated herein by reference
to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.26 - Form of Warrant Agreement dated as of August 31, 1994 between the
Registrant and Capello Capital Corp. Incorporated herein by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
10.27 - Amendment dated March 29, 1995 to Agreement dated January 26, 1994
between the Registrant and The Purdue Frederick Company. Incorporated herein by
reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.28 - Amendment dated March 29, 1995 to Agreement dated January 26, 1994
between the Registrant, Banela Corporation and Runham Corporation. Incorporated
herein by reference to Exhibit 10.38 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
41
10.29 - Amendment dated March 29, 1995 to Distribution Agreement dated June 14,
1991 between the Registrant and Purdue Pharma L.P. Incorporated herein by
reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.30 - Amendment dated March 29, 1995 to Amended and Restated Distribution
Agreement dated June 14, 1991 between the Registrant and Mundipharma
Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.40 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.31 - Amendment dated March 29, 1995 to Amended and Restated RS Agreement
dated January 26, 1994 among the Registrant, Mundipharma Pharmaceutical Company
and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.32 - Letter dated March 29, 1995 between the Registrant and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.42 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.33 - License Agreement, dated as of March 29, 1995, among the Registrant,
Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd. Incorporated herein by
reference to Exhibit 10.42 to Registration Statement No. 33-59479.
10.34 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10.43 to Registration Statement No. 33-59479.
10.35 - Form of note issued by the Registrant to National Patent Development
Corporation, Biotechnology Investment Group, L.L.C., and Edward Blech Charitable
Remainder Trust. Incorporated herein by reference to Exhibit 10.44 to
Registration Statement No. 33-59479.
10.36 - Form of note issued by the Registrant to National Patent Development
Corporation and Biotechnology Investment Group, L.L.C. Incorporated herein by
reference to Exhibit 10.45 to Registration Statement No. 33-59479.
10.37 - Amendment, dated July 31, 1995, to the Distribution Agreement, dated
June 14, 1991, between the Registrant and Purdue Pharma L.P. Incorporated herein
by reference to Exhibit 10.46 to Registration Statement No. 33-59479.
10.38 - Amendment, dated July 31, 1995, to the Amended and Restated Distribution
Agreement, dated June 14, 1991, between the Registrant and Mundipharma
Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.47 to
Registration Statement No. 33-59479.
10.39 - Letter dated July 31, 1995, between The Purdue Frederick Company
and the Registrant. Incorporated herein by reference to Exhibit 10.48 to
Registration Statement No. 33-59479.
10.40 - Letter dated July 31, 1995, by and among the Registrant, Banela
Corporation, and Runham Corporation. Incorporated herein by reference to Exhibit
10.49 to Registration Statement No. 33-59479.
10.41 - Amended and Restated R S Agreement, dated July 31, 1995, by and among
the Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.50 to Registration Statement No.
33-59479.
10.42 - Settlement Agreement, dated 27, 1995, among the Registrant, Amarillo
Cell Culture Company, Incorporated, Pharma Pacific Management Pty. Ltd., Pharma
Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited.
Incorporated herein by reference to Exhibit 10.51 to Registration Statement No.
33-59479.
10.43 - PPM/ACC Sub License Agreement, dated 27, 1995, between Pharma Pacific
Management Pty. Ltd., and Amarillo Cell Culture Company, Incorporated.
Incorporated herein by reference to Exhibit 10.52 to Registration Statement No.
33-59479.
10.44 - Letter Agreement, dated 29, 1992, between the Registrant and Strategic
Growth International, Inc. Incorporated herein by reference to Exhibit 10.53 to
Registration Statement No. 33-59479.
10.45 - Agreement, dated May 27, 1993, between the Registrant and Strategic
Growth International, Inc. Incorporated herein by reference to Exhibit 10.54 to
Registration Statement No. 33-59479.
10.46 - Lease Agreement, dated August 1, 1995, between the Registrant and
National Patent Development Corporation. Incorporated herein by reference to
Exhibit 10.55 to Registration Statement No. 33-59479.
42
10.47 - Amendment dated January 1, 1996 to Management Services Agreement dated
January 1, 1981 between the Registrant and National Patent Development
Corporation. Incorporated herein by reference to Exhibit 10.47 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
10.48 - Supply and Distribution Agreement, dated as of 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.56 to Registration Statement No. 333-00845.
10.49 - Quality Assurance Agreement, dated as of 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.57 to Registration Statement No. 333-00845.
10.50 - RS Agreement, dated 23, 1996, by and among the Registrant, Mundipharma
Pharmaceutical Company, and Purdue Pharma L.P. Incorporated herein by reference
to Exhibit 10.58 to Registration Statement No. 333-00845.
10.51 - Agreement, dated 23, 1996, between the Registrant and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.59 to Registration
Statement No. 333-00845.
10.52 - Agreement, dated 23, 1996, between the Registrant and Mundipharma
Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.60 to
Registration Statement No. 333-00845.
10.53 - Form of Subscription Agreement used in connection with the December 1996
Private Placement.
10.54 - Agreement, dated as of April 1, 1997, between the Registrant and the
American National Red Cross. Incorporated by reference to Exhibit 10.54 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.55 - Agreement, dated May 27, 1997, between the Registrant and Alternate Site
Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.56 - Form of Subscription Agreement used in connection with the 1997 private
placement.*
10.57 - Stock Bonus Plan.*
10.58 - Form of employment agreement for participants in Stock Bonus Plan.*
10.59 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon.*
21.0 - Subsidiaries of the Registrant.*
23.1 - Consent of Independent Auditors. *
- -----------------
[FN]
*Filed herewith
43